Stock market development and economic growth

The role of information dynamics in the emergence of stock markets

We know that there is a relationship between stock market development and economic development, but what are the dynamics of that relationship? This paper critically examines the current state of the theoretical literature on this question, highlighting new developments and unanswered questions.

After summarising the empirical evidence of the way that stock markets emerge as economic development progresses, the paper then considers literature from the literature’s two main theoretical perspectives:

the institutional approach, which focuses on the role of markets and institutions
the instrumental approach, which attends to the nature of the underlying financial contracts

New studies within this latter approach integrate microeconomic models of optimal financial contracts under information asymmetry into dynamic general equilibrium models. The paper highlights several of the interesting questions raised by these studies about the role played by information dynamics and information technology diffusion on firms’ financing choice and, in turn, on financial market development and economic growth.

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Stock market development and economic growth