This article studies a previously unknown asset market in eighteenth-century Sweden. It emerged as a result of a partial default in 1719, when large amounts of recently released fiat coins were converted into government liabilities. These could only be redeemed as a customs duty on international trade, the licent. As merchants had to acquire such assets to conduct their trade, tens of thousands of transactions were carried out on a secondary market over a period of more than 45 years. Networks of local merchants bought assets from initial holders and sold them on to intermediaries or merchants, who deposited the liabilities with a newly established government agency, the Debt Office. Here, hundreds of account holders could transfer the value of their deposits between them. When a licent payment was due, the amount was deducted from the merchant's account. Prices on the liabilities were low and sometimes volatile, but the long-term trend was rising. We have distinguished three types of market participants: a small group of very active users, most of them professional dealers or brokers; merchants who traded on a regular basis as they needed to pay the licent, or when a favorable opportunity appeared; and finally, those who traded sporadically. The emergence of this market was part of a financial expansion that occurred in many European countries at the same time, the closest equivalent being the segmented default in France after the abolition of John Law's system. This study aims to broaden our understanding of eighteenth-century financial developments, which have rarely been studied in a semi-peripheral European economy.

In this study, we examine disparities in financial development at the regional level in India. The major research questions of the study are: how do we measure the level of financial development at the sub-national level? How unequal is financial development across the states? Does it vary by ownership of financial institutions? To explore these research questions, our study develops a composite banking development index at the sub-national level for three different bank groups – public, private and foreign for 25 Indian states covering 1996–2015. Our findings suggest that despite reforms, banking development is significantly higher in the leading high income and more developed regions compared to lagging ones. Furthermore, we find that all bank groups including public banks are concentrated more in the developed regions. Overall, over the years the position of top three and bottom three states in the aggregate banking index have remained unchanged reflecting lop-sidedness of regional development. We also note improvement in the ranking of some north-eastern states during the period 2009–15.

This paper examines the mechanisms that determine the “vanishing effect of finance” on economic growth found in recent studies. Based on both current (171 countries, 1960–2014) and historical (21 OECD countries, 1870–2009) data, the results show that financial development promotes growth in poorer countries by increasing education and investment, and by decreasing fertility. The relevance of these transmission channels declines when countries become richer. The growth effect of the financial sector in high-income countries primarily depends on new ideas and potentials for innovation projects. Consequently, the major decline in factor productivity growth since the early 2000s has contributed to the reduction in the financial sector’s average effect on growth.

We present an analysis of interregional consumption risk sharing in Russia between 1999 and 2009 using novel estimation methods. In addition to standard fixed-effects panel estimations, we use system and difference GMM estimators to reflect time dynamic properties and possible endogeneity between output and consumption. Furthermore, we apply spatial models that control for spatial dependence across regions. The results show that regional consumption deviations from the national average are highly persistent in time and space. Nevertheless, the regional consumption risk sharing in Russia is relatively high with 70%–90% of idiosyncratic risk being smoothed. Finally, fiscal policy and the degree of financial development appear to contribute to the consumption smoothing.

This article shows that neither stock markets nor commercial banks had a significant impact on the UK's economic growth from 1850 to 1913. These results are based on a new dataset on paid-in capital of securities listed on the UK's stock exchanges, which is analysed using a vector autoregression with time-varying parameters. Econometric results also indicate that the growth of the banking sector and the capital markets was, to a significant extent, driven by factors other than domestic economic growth.

We analyze the simplest possible model of endogenous growth to account for the role of financial development. In our setting, financial development affects productivity and determines the amount of resources subtracted to capital investment. We show that under very general assumptions, the relation between economic growth and financial depth is nonmonotonic, and eventually bell-shaped. We empirically assess our results in a framework that allows to distinguish between long-run and short-run effects. We establish a cointegrating relation and derive the long-run elasticities of per capita gross domestic product (GDP) with respect to employment, the physical capital stock, and financial depth–relying on linear as well as nonlinear models for the finance-growth nexus. We employ the results of the first step estimation to specify an error–correction model and find that there is strong evidence for a nonlinear relationship between financial depth and per capita GDP, consistently with what was predicted by our theoretical model.

Using cross-country differences in the degree of isolation before the advent of technologies in sea and air transportation, we assess the relationship between geographical isolation and financial development across the globe. We find that prehistoric geographical isolation has been beneficial to development because it has contributed to contemporary cross-country differences in financial intermediary development. The relationship is robust to alternative samples, different estimation techniques, outliers and varying conditioning information sets. The established positive relationship between geographical isolation and financial intermediary development does not significantly extend to stock market development.

This paper considers the political economy of financial development in an overlapping generations model that incorporates credit market imperfections, and shows that income inequality is a determinant of financial and economic development. Individuals have an opportunity to start an investment project at a fixed cost, but their income to finance the cost is unequal. The government proposes a policy financed by taxation that mitigates credit market imperfections, the implementation of which is determined through majority voting. The policy benefits middle-income individuals who can start the investment only after the implementation of the policy. The policy is, however, against the interest of the rich who wish to block such new entry, and that of the poor who wish to avoid the tax burden. Whether the policy obtains majority support depends on income inequality. High income inequality makes the policy hard to implement, which causes financial and economic underdevelopment.

This research demonstrates that international financial integration changes the way in which financial development affects inequality within a country. Specifically, both cross-country analysis and dynamic panel data analysis using data collected from more than 100 countries provide evidence indicating that if the financial market of a country is strongly closed to the world market, financial development narrows inequality within that country, whereas if the financial market of a country is strongly open to the world market, financial development widens inequality within that country. Our theoretical framework provides a possible explanation for our empirical findings.

This paper uses spectral theory to develop the following two testable hypotheses in a unified framework for the predictions of business-cycle and endogenous growth models: (i) financial development affects only business-cycle volatility; and (ii) shocks affect both business-cycle volatility and long-run volatility of GDP growth. In other words, volatility caused by shocks is more persistent than that caused by financial underdevelopment. We decompose the business-cycle and long-run volatility by the spectral method and then test the hypotheses at the cross-country level. Empirical evidence provides support for both hypotheses. Higher private credit, a bank-based measure of financial development, dampens business-cycle volatility but not long-run volatility. Volatility of shocks, as measured by the volatility of changes in the terms of trade, magnifies both business-cycle and long-run volatility. The results are robust to accounting for endogeneity, a market-based measure of financial development, and an alternative method of volatility decomposition.

In this article we re-evaluate the hypothesis that the development of the financial sector was an essential factor behind economic growth in nineteenth-century Germany. We apply a structural VAR framework to a new annual data set from 1870 to 1912 that was initially compiled by Walther Hoffmann (1965). With respect to the literature, the distinguishing characteristic of our analysis is the focus on different sectors in the economy and the interpretation of the findings in the context of a two-sector growth model. We find that all sectors were affected significantly by shocks from the banking system. Interestingly, this link is the strongest in sectors with small or non-tradable-goods-producing firms, such as construction, services, transportation and agriculture. In this regard, the growth patterns in nineteenth-century Germany are similar to those in today's emerging markets.

The structure of the USA and the countries that emerged from the remains of Gran Colombia ultimately took different shapes from those suggested in the era immediately after independence, particularly in regard to the extent of each state's fiscal and monetary capacities. This article applies Oszlak's model of ‘stateness’ to the early financial and monetary histories of the USA (roughly 1776–93) and Gran Colombia (roughly 1819–35) to assess and compare the role of financial and monetary capacities in long-run state consolidation and economic development. The US was ultimately more successful than Gran Colombia at adapting its financial and monetary capacities and institutions, creating better conditions for the attainment of ‘stateness’, stronger economic growth, and greater endurance as a national entity. The comparison ultimately suggests a reciprocal relationship between the legitimization of a state's authority (that is, state consolidation) and the development and solidification of fiscal and monetary capacities.

This essay considers the literature on the topic of social capital in relation to the economic science, and opens new perspectives of research in this area. This essay starts with a walk through the history of economic thought that has influenced social capital literature. Afterwards, the reader will find a discussion on different perspectives of research that have been followed up to now and some others in relation with the microeconomic foundations of the concept of social capital, and its connexion with economic growth and finance.

This paper studies the long- and short-run relationships between inflation and financial development. Applying the Pooled Mean Group estimator of Pesaran, Shin, and Smith (1999, Journal of the American Statistical Association 94, 621–634) to unbalanced panel data for 87 countries over the period 1960–2005, we find that a negative long-run relationship between inflation and financial development coexists with a positive short-run relationship. However, when the data are split into different income or inflation groups, these results can be observed only in low-income or low-inflation economies.

We develop a theory of financial development based on the costs associated with the provision of external finance. These costs arise through informational asymmetries between borrowers and lenders that are costly to resolve. When borrowing is limited, producers with access to financial intermediary loans obtain higher returns to investment than other producers. This creates incentives for others to undertake the technology adoption necessary to access investment loans. Over time, as increasing numbers of producers gain access to external finance, borrowers' net worth rises relative to debt. This reduces the costs of financial intermediation and raises the overall return on investment. The theory is consistent with recent evidence that financial development reduces the costs associated with the provision of external finance and increases the rate of economic growth. Furthermore, the theory predicts that financial development will raise the return on loans and reduce the spread between borrowing and lending rates.