, Volume 26, Issue 2, pp 138-148

Financial development and productive efficiency: A panel study of developed and developing countries

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Abstract

This paper uses a stochastic production frontier for panel data to investigate the effect of financial development on productive efficiency. Three panels of a number of countries in different stages of development are used along with eight alternative measures of financial development pertaining to the monetary sector, financial intermediaries, and equity markets. The results indicate that in general the more developed the financial intermediaries sector and equity markets, the higher the productive efficiency. In particular, financial deepening reduces productive inefficiency in both developed and developing countries, although the effect is larger in the former.

The author wishes to thank three anonymous referees for their many helpful comments on an earlier version of this paper. All remaining errors are the author's responsibility. A slightly different version of this paper was presented at the 50th annual conference of the International Atlantic Economic Society, Charleston, South Carolina, October 2000. This research is partially funded by a Marquette University College of Business Administration Faculty Research Grant from the Miles Fund and a grant from Marquette University Institute for International Economic Affairs.