How does Finance A¤ect Growth? Evidence from a Natural Experiment in Venezuela

This paper examines the relation between …nancial development and economic growth by looking at plant-level evidence. I argue that by focusing on a largely exogenous event, the implementation of exchange controls in Venezuela in 1983, this approach avoids many of the challenges facing the literature. Most importantly this quasi-experimental setting allows me to deal directly with the issue of causality and makes it possible to avoid the signi…cant challenge of …nding an accurate proxy for …nancial development. To identify the e¤ect of the event on plant performance I employ a di¤erence-in-di¤erences methodology and a variety of treatment-control comparisons. I …nd convincing evidence that a negative shock to …nancial development reduces plant output and productivity. Overall, my …ndings highlight that causality can run from …nance to growth.