Strictly speaking, there was no development of Israelite literature or religion during the Babylonian Exile, simply because Israel had ceased to exist, around two hundred years earlier. Jewish literature and religion did develop during the Exile.
Judah, for the first time in its history, found itself without a king or even a recognised line of succession. Although the Jews no longer had a country, they seem to have been self-governing and needed someone to fill the void left by the loss of the royal line. The priesthood took over, and the nation became a theocracy. With this power came the ability and desire to rewrite history. Scholars generally accept that the Deuteronomic History (Joshua, Judges, 1 Samuel, 2 Samuel, 1 Kings and 2 Kings) was written shortly before the Exile, although a minority view is that it was really written during the Exile. The Books of Chronicles were written during or shortly after the Exile, to provide a Priestly point of view for the history of the Hebrew peoples. Some material in the Deuteronomic History was altered or omitted, while some new material was added.
The Priestly Source finalised the Pentateuch, which was subsequently revised and edited by the Redactor into much the same form as we see today.
The psalms began to be written during the Babylonian Exile, and new psalms continued to be written over the next two hundred years. This was a new genre of writing that gave the exiled Jews hope and encouragement, as well as entrenching certain religious beliefs.
A number of new prophetic books were written during this period, including one by an anonymous author now known as Second Isaiah. At some stage after the Return from Exile, the work of Second Isaiah was added to the Book of Isaiah, thus the name commonly used for this anonymous author.
Scholars generally accept that religious monotheism had been introduced in the time of King Josiah and was well entrenched by the time of the Exile, even if not necessarily held by all Jews. Once again, a small minority of scholars say that monotheism was really adopted during the Exile and written retrospectively into the scriptures. During the Exile, the Jews had come into contact with the monotheistic Zoroastrian religion of their Persian liberators.
A number of new religious concepts began to appear in Judaism during and after the Exile. Satan had never been mentioned in the scriptures written before the Exile, but now entered Jewish belief. He was even retrospectively written into Chronicles. Other beliefs that had close parallels with Zoroastrianism include the concepts of angels and heaven as a place of eternal reward. Although hell was also a Zoroastrian concept, it does not seem to have been adopted by Judaism at this stage.
Judaism started in the middle east which at the time was not an empire but a collection of monarchies. For those who believe that the modern religion in Judaism did not develop until the Babylonian Exile (a position not endorsed by Jews), the answer would be: the Neo-Babylonian Empire.
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