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The Co-Evolution of the Real and Financial Sectors in the Growth Process

Working Paper 541 | Published February 1, 1996

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Authors

Bruce D. Smith

John H. Boyd

The Co-Evolution of the Real and Financial Sectors in the Growth Process

Abstract

We produce a theoretical framework that helps explain the co-evolution of the real and financial sectors of an economy in the growth process, as described by Gurley and Shaw. According to them, self-financed capital investment first gives way to debt finance and later to the emergence of equity as an additional instrument for raising funds externally. As the economy develops further, the aggregate ratio of debt to equity will generally fall. We analyze that portion of their account concerning the evolution of equity markets. We show that in an important sense, debt equity are complementary sources for the financing of capital investments.


Published in: _World Bank Economic Review_ (Vol. 10, No. 2, May 1996, pp. 371-396), https://doi.org/10.1093/wber/10.2.371.