| There is now considerable evidence that financial development enhances per capita income and productivity growth, as surveyed by Levine (2004). However, there is much less agreement in the literature regarding the effects of capital account liberalization and financial development on poor and emerging market economies. This study develops and tests several new models of how financial development affects overall growth by focusing on their implications for different sectors of the economy. The findings obtained with the use of panel data for the period 1980--2003 are consistent with the capital flows and growth extended version of the Warner (2003) model, and the Tornell, Westerman and Martinez (2004) model of financial liberalization and accelerated rise of non-traded goods sectors. More precisely, domestic credit, the real exchange rate and investment are identified as fundamental channels that also impact the development of non-tradable sectors. Finally, there is empirical evidence to support that credit crunches and banking crises are particularly harmful for non-traded goods sectors, which recovery is much slower than for traded goods sectors. |
