Financial Development and Industry Diversification

ALFREDO SCHCLAREK; JOSE LUIS NAVARRETE

CABA

Seminario; SEMINARIO DE ECONOMÍA N°177, Banco Central de la Republica Argentina; 2015

Banco Central de la Republica Argentina

This paper theoretically and empirically studies industry or sector diversification as a determinant to financial development. The theoretical model explains endogenously the development of the financial system as a result of industry (or sector) diversification. An economy with more sectors (industry diversification) imply a greater opportunity for diversifying lending risk and thus a reduction in the aggregate risk of the financial system. This reduction in the aggregate risk of the financial system is what determines financial development. The empirical evidence find support to the theoretical model. The policy implications are that the government should promote the creation of new industrial sectors by subsidizing R&D and innovation.