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Financial Development and Real Price Level Differences
Author(s) -
Xu Zhenhui,
Feldman David H.
Publication year - 1999
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/1467-9361.00049
Subject(s) - cointegration , economics , developing country , price level , granger causality , monetary economics , causality (physics) , macroeconomics , econometrics , economic growth , physics , quantum mechanics
Real price levels are systematically lower in developing countries than in developed countries. This paper provides time series evidence about the effect of financial development on real price level differences for 40 developing countries. Based on cointegration tests, a long‐run equilibrium relationship is found between financial development and real price level differences in 21 countries. In seven countries, financial development “Granger‐causes” real price level differentials, while for 19 countries the causality runs in the opposite direction. Country‐specific institutional or political‐economy differences, typically ignored in cross‐section analysis, likely play an important role in real price level differences.