Do capital markets matter for growth?

The development of capital markets as a means of promoting economic growth has increasingly become a policy priority worldwide. But can changes in financial structure alone deliver this promise? This paper examines the capital market-growth relationship, drawing on both theoretical and empirical literature to provide a conceptual framework for thinking about this question. Market-based finance can improve allocative efficiency, facilitate high-risk, long-term investment, and possibly increase resilience during economic downturns. But the broad empirical evidence linking financial structures and economic outcomes is far from conclusive, and equity and debt markets operate through very different channels. The literature also points to clear complementarities between banks and securities markets, as well as possible risks associated with non-bank debt finance. The impact of capital markets on growth is real, but far less mechanical than is sometimes implied in contemporary policy debate. Because they enable growth through very specific channels, their effectiveness depends on the nature of the growth constraint being addressed; capital markets can help overcome financial barriers to growth, but may have limited impact in other areas.