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financial development and economic growth

financial development and economic growth. review on some literatures. Debates on the relationship. Joseph Schumpeter (1912): financial market identifying and funding entrepreneurs technological and production innovation.

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financial development and economic growth

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  1. financial development and economic growth review on some literatures

  2. Debates on the relationship • Joseph Schumpeter (1912): financial market • identifying and funding entrepreneurs • technological and production innovation • Joan Robinson (1952) :financial system responds automatically to the demandsof economic development

  3. Financial system leads? Or economic growth? • Theoretical analysis • Theoretical models • Historical experience • Empirical study

  4. Theoretical analysis 1 • Ross Levine (1997) • Facilitate the trading, hedging, diversifying, and pooling of risk • Allocate resources • Monitor managers and exert corporate control • Mobilize saving • Facilitate the exchange of goods and services

  5. Market friction • Information costs • Transaction costs Financial market and intermediaries • Financial functions • Mobile saving • Allocate resources • Exert corporate control • Facilitate risk management • Ease trading of goods, services, contracts • Channels to growth • Capital accumulation • Technological innovation Growth Figure 1 A theoretical approach to finance and growth

  6. Historical aspect • Rousseau and Sylla (2001) • What are good financial systems in history and their consequence? • Countries: the Netherlands, Great Britain, the United States, France, Germany, and Japan

  7. Netherlands, Great Britain, and the United States: • developed good financial systems early • attracted foreign capital inflows that served to enhance their growth • leaders in the export of capital after development

  8. five key components for a good financial system • Sound public finances and public debt management, • stable monetary arrangements, • a variety of banks, domestic and international orientations or both • a reasonable central bank • well-functioning securities markets. • (Insurance: more important in modern societies)

  9. Empirical study • King and Levine (1993) • Rousseau and Sylla (2001)

  10. King and Levine (1993) • Hypothesis: whether higher levels of financial development are positively associated with economic development • Data: over 80 countries from 1960 through 1989

  11. King and Levine (1993) • a purely cross-country analysis using data averaged over the 1960-1989 period • a pooled cross-country, time-series study using data averaged over 1960s, 1970s, and 1980s.

  12. 4 indicators of financial development • LLY: ratio of liquid liabilities to GDP to represent financial depth • BANK: deposit banks relative to the central bank in allocating domestic credit • PRIVATE: credit issued to non-financial private firms divided by total credit • PRIVY: credit issued to non-financial private firms divided by GDP

  13. 4 growth indicators • GYP: per capita GDP growth • GK: rate of capital accumulation • INV: ratio of gross national investment divided by output • EFF: improvement in economic efficiency

  14. merely reflects a positive correlation between financial development and economic growth • Or financial structure is predetermined component

  15. Conclusion King and Levine (1993) • positive association between financial development and economic growth • Finance does not only follow growth but importantly lead economic growth • high levels of financial development tends to relatively fast economic growth over the next 10 to 30 years.”

  16. Rousseau and Sylla (2001) • Partial correlations among growth, financial depth (the ratios of broadly-defined money) and international trade to output • 1850 to 1997 • 17 countries

  17. Financial depth: ratio of the broadest available monetary aggregate to output • economic performance: growth in real per capita incomes.

  18. Conclusion: Rousseau and Sylla (2001) • Robust correlation between financial factors and economic growth • countries with more sophisticated financial systems engage in more trade • be better integrated with other economies • Atlantic economies: the absolute convergence in long-term interest rates

  19. Near the end • The literature in this area of study is generally more supportive of the argument that financial development will spur economic growth

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