Does Economic Diversification Lead to Financial Development? Evidence From topography

January 1, 2006

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Format: Chicago

Rodney Ramcharan. Does Economic Diversification Lead to Financial Development? Evidence From topography, (USA: International Monetary Fund, 2006) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

An influential theoretical literature has observed that economic diversification can reduce risk and increase financial development. But causality operates in both directions, as a well functioning financial system can enable a society to invest in more productive but risky projects, thereby determining the degree of economic diversification. Thus, ordinary least squares (OLS) estimates of the impact of economic diversification on financial development are likely to be biased. Motivated by the economic geography literature, this paper uses instruments derived from topographical characteristics to estimate the impact of economic diversification on the development of finance. The fourth estimates suggest a large and robust role for diversification in shaping financial development. And these results imply that, by impeding financial sector development, the concentration of economic activity common in developing countries can adversely affect financial and economic development.

Subject: Bank deposits, Economic sectors, Financial markets, Financial sector development, Financial services, Manufacturing, Population and demographics

Keywords: Africa, Bank deposits, Central bank, Diversification, Diversification coefficient, Economic development, Estimates of the impact, Estimation procedure, Financial development, Financial sector development, Fixed cost, Geography, Gini coefficient, Impact of diversification, LIML estimate, Manufacturing, OLS estimate, Per capita income, Point estimate, Private property, Standard deviation increase, Value added, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/035
Stock No:

WPIEA2006035
ISBN:

9781451862959
ISSN:

1018-5941

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