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Does Openning Stock Exchange Increasde Economic Growth

Does Openning Stock Exchange Increasde Economic Growth

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Published by: Ahmed on Nov 12, 2008
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 Working Paper Series
Does Opening a Stock Exchange Increase Economic Growth?
Scott L. Baier, Gerald P. Dwyer Jr., and Robert TamuraWorking Paper 2003-36December 2003
The authors thank Scott Hein for helpful comments. Shalini Patel provided her usual careful research assistance. Earlierversions of this paper were presented at the conference on Finance and Growth at the Federal Reserve Bank of Atlanta anda Banking Workshop at the Bank of Finland. We thank the participants at both conferences for many helpful comments andJames Lothian and Paul Wachtel for their written comments. This paper is forthcoming in the
 Journal of International Money and Finance
. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.Please address questions regarding content to Scott L. Baier, Clemson University, 222 Sirrine Hall, Clemson, SC 29634-1309,864-656-4534, sbaier@clemson.edu, Gerald P. Dwyer Jr., Federal Reserve Bank of Atlanta, 1000 Peachtree Street, NE,Atlanta, GA 30309-4470, 404-498-7095, gdwyer@dwyerecon.com, or Robert Tamura, Clemson University, 222 Sirrine Hall,Clemson, SC 29634-1309, 864-656-1242, rtamura@clemson.edu.The full text of Federal Reserve Bank of Atlanta working papers, including revised versions, is available on the Atlanta Fed’sWeb site at http://www.frbatlanta.org. Click on the “Publications” link and then “Working Papers.” To receive notificationabout new papers, please use the on-line publications order form, or contact the Public Affairs Department, Federal ReserveBank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.
Federal Reserve Bank of AtlantaWorking Paper 2003-36December 2003
Does Opening a Stock Exchange Increase Economic Growth?
Scott Baier, Clemson UniversityGerald P. Dwyer Jr., Federal Reserve Bank of AtlantaRobert Tamura, Clemson University
We examine the connection between the creation of stock exchanges and economic growth with anew set of data on economic growth that spans a longer time period than generally available. We find thateconomic growth increases relative to the rest of the world after a stock exchange opens. Our evidence indicatesthat increased growth of productivity is the primary way that a stock exchange increases the growth rate of output, rather than an increase in the growth rate of physical capital. We also find that financial deepening israpid before the creation of a stock exchange and slower subsequently.JEL classification: G15, G10, G15, D90, O16Key words: economic growth, stock exchange, efficiency, productivity, financial deepening
Does Opening A Stock Exchange Increase Economic Growth?
Over the last decade there has been a growing body of literature examining the connectionbetween economic growth and financial markets and intermediation. These studies indicate that“financial deepening” – generally measured by growth of a broad monetary aggregate relative toincome – is positively correlated with economic growth, and several suggest that financial deepeningis causal in the sense that financial deepening precedes higher economic growth (Levine 2002).There is at least one recently expressed reservation about the strength of the inference that can bedrawn (Wachtel 2002).Overall, this literature on financial development and economic growth suggests that financialdevelopment has a substantial effect on economic growth. As Atje and Jovanovic (1993) put it, “If it is true, then it is ... surprising that more countries are not developing their stock market as a meansof speeding up their economic development.” Despite attempts to draw this inference that plannedfinancial development would spur growth, there have been few studies that investigate directly howthe introduction of financial institutions affects economic growth. Perhaps the closest is the researchby Bekaert, Harvey, and Lundblad (2003), who focus on liberalization of governments’ restrictionson financial affairs in developing countries and find substantial effects. While informative, theestimated effects may be overstated because liberalizing equity markets generally is not the onlyreform in progress.

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