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Threshold Effect and Financial Intermediation in Economic Development

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  • Laurent Augier

    () (Université de Poitiers-CRIEF and Université de La Rochelle)

  • Wahyoe Soedarmono

    () (Université de Limoges, LAPE)

Abstract

This paper reformulates the finance-growth nexus in the case of developing countries. Using the Neoclassical growth framework, our contribution is threefold. First, we show that entrepreneurship is a growth-enhancing factor in both financial intermediary equilibrium and financial market equilibrium. Second, we show that agent's saving is one of the determinants of the optimal proportion of long-term investment and hence, we characterize the role of bank as financial intermediary. Third, our model is characterized by the existence of multiple steady states equilibrium with threshold effect that impedes the economy to reach a long-run higher steady state equilibrium. Furthermore, we show that financial intermediary is better than financial market, in order to reduce threshold effect and to ensure the long-run steady state equilibrium of capital stock.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 31 (2011)
Issue (Month): 1 ()
Pages: 342-357

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Handle: RePEc:ebl:ecbull:eb-10-00619

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Keywords: Threshold Effect; Financial Intermediary; Economic Growth; Developing Countries;

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References

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  1. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-58, June.
  2. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2002. "Funding growth in bank-based and market-based financial systems: evidence from firm-level data," Journal of Financial Economics, Elsevier, vol. 65(3), pages 337-363, September.
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  9. Allen N. Berger & Emilia Bonaccorsi di Patti, 2002. "Capital structure and firm performance: a new approach to testing agency theory and an application to the banking industry," Finance and Economics Discussion Series 2002-54, Board of Governors of the Federal Reserve System (U.S.).
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  12. Levine, Ross, 1991. " Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-65, September.
  13. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
  14. Koetter, Michael & Wedow, Michael, 2010. "Finance and growth in a bank-based economy: Is it quantity or quality that matters?," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1529-1545, December.
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  17. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  18. Hasan, Iftekhar & Koetter, Michael & Wedow, Michael, 2007. "The quality of banking and regional growth," Discussion Paper Series 2: Banking and Financial Studies 2007,10, Deutsche Bundesbank, Research Centre.
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Cited by:
  1. Stolbov, Mikhail, 2013. "The finance-growth nexus revisited: From origins to a modern theoretical landscape," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 7(2), pages 1-22.

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