Finance and Growth : theory and evidence

1. Finance and Growth: theory and evidence Michele Faggion Elisabetta Mingardo Roberto Puglisi International Economics and Finance – 30/11/2011

2. Part 1 Introduction • Part 2 Influenceof financialdevelopment on economicgrowth • Part 3 Bank-basedsystem vs. Marked basedsystem: pros and cons • Part 4 Econometricapproaches • Part 5 Conclusions Finance and Growth: theory and evidence Index

3. Part 1 Introduction Influence of financialdevelopment on economicgrowth Bank-basedsystem vs. Marked-basedsystem: pros and cons Econometricapproaches Conclusions

4. Introduction • “Whereenterpriseleads, financefollows” (Robinson, 1952) • “[The idea] thatfinancialmarketscontribute to economicgrowthis a propositiontooobvious for seriousdiscussion” (Miller, 1998) Isfinance a determinant of economicgrowth? • There are different positions among economists on the relationship between finance and economic growth. • Research clarifies the role of finance in economic growth will have policy implications and shape policy-oriented research.

5. Part 2 Introduction Influence of financialdevelopment on economicgrowth Bank-basedsystem vs. Marked-basedsystem: pros and cons Econometricapproaches Conclusions

6. Influence of financial development on economic growth • The development of financialinstruments, markets and institutions can ameliorate market frictions, change the incentives and constrintsfacingeconomic agents. • The issueisdeterminewhetherfinancialsystem can positivelyaffectsavingrates, investmentdecisions, tecnologicalinnovationsand, hence, long-termeconomicgrowth.

7. Financial Functions • We’llanalyse the mainfunctionsprovided by the financialsystem: • Producing information and allocating capital • Monitoringinvestments and exerting corporate governance • Diversification and risk management • Mobilizing and poolingsavings. • Easing the exchange of goods and services.

8. Financial Functions 1) Producing information and allocating capital • There are huge information costs to sustainbeforemaking an investmentdecision (evalutatingfirms, manager and market conditions) • Small saversmaynothaveenoughtrosources to providetheseinformations. Sincesaverswillprefer to invest in activities with reliable information and lowerrisks, high information costmayprevent capital from flowing to more innovative and riskieractivities. • For thisreason, the development of finacialintermediariesshould reduce cost of information and, hance, improveresouceallocation.

9. Part 3 Introduction Influence of financialdevelopment on economicgrowth Bank-basedsystem vs. Marked-basedsystem: pros and cons Econometricapproaches Conclusions

10. Part 4 Introduction Influence of financialdevelopment on economicgrowth Bank-basedsystem vs. Marked-basedsystem: pros and cons Econometricapproaches Conclusions

11. Part 5 Introduction Influence of financialdevelopment on economicgrowth Bank-basedsystem vs. Marked-basedsystem: pros and cons Econometricapproaches Conclusions