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FINANCIAL DEVELOPMENT AND THE SOURCES OF GROWTH AND CONVERGENCE *
Author(s) -
Badunenko Oleg,
RomeroÁvila Diego
Publication year - 2013
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12009
Subject(s) - economics , productivity , production–possibility frontier , convergence (economics) , production (economics) , argument (complex analysis) , frontier , physical capital , capital accumulation , capital (architecture) , technological change , finance , monetary economics , macroeconomics , human capital , market economy , history , biochemistry , chemistry , archaeology
We extend the deterministic, nonparametric production frontier framework by incorporating financial development. Our analysis convincingly shows that (1) failure to account for financial development overstates the role of physical capital accumulation in labor productivity growth, (2) most of this overstated contribution stems from the efficiency‐enhancing role of well‐functioning financial institutions, (3) international polarization is solely driven by efficiency changes, and (4) increased distributional dispersion of productivity is primarily driven by technological change. Model’s extensions to account for the growth effect of changes in the institutional environment only add to the argument about the overstated role of physical capital.