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

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