Financial Development, Sectoral Reallocation, and Volatility: International Evidence

This paper studies how \u85nancial development a¤ects the volatility of GDP growth through the channel of sectoral reallocation. For 28 OECD countries over the period 1970-2007, we construct a benchmark industrial portfolio which minimizes the econ-omys long-term volatility for a given level of long-term per capita growth. We \u85nd that nancial development increases substantially the speed with which the observed industrial composition of output converges towards the benchmark. In order to over-come endogeneity concerns, we exploit sectoral sensitivities to \u85nancial deepening and exogenous liberalization events