Advanced Search
MyIDEAS: Login to save this paper or follow this series

Wealth, Financial Intermediation and Growth

Contents:

Author Info

  • Alejandro Gaytan
  • Romain Ranciere

Abstract

This paper presents empirical support for the existence of wealth effects in the contribution of financial intermediation to economic growth, and offers a theoretical explanation for these effects. Using GMM dynamic panel data techniques applied to study the growth-promoting effects of financial intermediation, we show that the exogenous contribution of financial development on economic growth has different effects for different levels of income per capita. We find that this contribution is generally increasing with the level of income per capita of the economy, up to a relatively high level of income. This contribution is consistently lower for poor countries; and for some low levels of income per capita it can be negative. We provide a model to account for these wealth effects. The model is a overlapping generations growth model where financial intermediaries implement liquidity risk sharing among depositors. We show that at early stages of economic development, a bank can increase welfare of its depositors only at the cost of lowering investment and growth. However, once the economy has crossed certain wealth threshold, the liquidity role of banks becomes unambiguously growth enhancing. As wealth increases, banks offer improving liquidity insurance, and higher growth; however, for high levels of wealth, growth generated by financial intermediation declines as the economy attains the optimal level of consumption risk sharing.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://research.barcelonagse.eu/tmp/working_papers/191.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 191.

as in new window
Length:
Date of creation: Jan 2004
Date of revision:
Handle: RePEc:bge:wpaper:191

Contact details of provider:
Postal: Ramon Trias Fargas, 25-27, 08005 Barcelona
Phone: +34 93 542-1222
Fax: +34 93 542-1223
Email:
Web page: http://www.barcelonagse.eu
More information through EDIRC

Related research

Keywords: Financial development; economic growth; OLG growth models; liquidity; financial intermediation;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Ilan Goldfajn & Rodrigo O. Valdés, 1997. "Capital Flows and the Twin Crises," IMF Working Papers, International Monetary Fund 97/87, International Monetary Fund.
  2. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 29-51, July.
  3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 473-500, June.
  4. Fulghieri, Paolo & Rovelli, Riccardo, 1998. "Capital markets, financial intermediaries, and liquidity supply," Journal of Banking & Finance, Elsevier, Elsevier, vol. 22(9), pages 1157-1180, September.
  5. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
  6. Alonso-Borrego, Cesar & Arellano, Manuel, 1999. "Symmetrically Normalized Instrumental-Variable Estimation Using Panel Data," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 17(1), pages 36-49, January.
  7. De Gregorio, Jose & Guidotti, Pablo E., 1995. "Financial development and economic growth," World Development, Elsevier, Elsevier, vol. 23(3), pages 433-448, March.
  8. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(3), pages 485-91, June.
  9. Alejandro Gaytán González & Romain Ranciere, 2005. "Banks, Liquidity Crises and Economic Growth," Working Papers, Banco de México 2005-03, Banco de México.
  10. Acemoglu, Daron & Zilibotti, Fabrizio, 1996. "Was Prometheus Unbound by Chance? Risk, Diversification and Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1426, C.E.P.R. Discussion Papers.
  11. Qi, Jianping, 1994. "Bank Liquidity and Stability in an Overlapping Generations Model," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 7(2), pages 389-417.
  12. Huberto M. Ennis & Todd Keister, 2003. "Economic growth, liquidity, and bank runs," Working Paper, Federal Reserve Bank of Richmond 03-01, Federal Reserve Bank of Richmond.
  13. Levine, Ross & Loayza, Norman & Beck, Thorsten, 2000. "Financial intermediation and growth: Causality and causes," Journal of Monetary Economics, Elsevier, Elsevier, vol. 46(1), pages 31-77, August.
  14. S. Bhattacharya & P. Fulghieri & R. Rovelli, 1997. "Financial Intermediation Versus Stock Markets in a Dynamic Intertemporal Model," Working Papers 300, Dipartimento Scienze Economiche, Universita' di Bologna.
  15. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1687, C.E.P.R. Discussion Papers.
  16. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  17. Levine, Ross & Zervos, Sara, 1996. "Stock Market Development and Long-Run Growth," World Bank Economic Review, World Bank Group, World Bank Group, vol. 10(2), pages 323-39, May.
  18. Norman Loayza & Romain Ranciere, 2002. "Financial Development, Financial Fragility, and Growth," CESifo Working Paper Series 684, CESifo Group Munich.
  19. repec:fth:wobaco:1083 is not listed on IDEAS
  20. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
  21. George-Marios Angeletos & Laurent E. Calvet, 2001. "Incomplete Markets, Growth, and the Business Cycle," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1910, Harvard - Institute of Economic Research.
  22. Catherine Pattillo & Hélène Poirson & Luca Antonio Ricci, 2011. "External Debt and Growth," Review of Economics and Institutions, Università di Perugia, Università di Perugia, vol. 2(3).
  23. Roberto Chang & Andres Velasco, 1997. "Financial fragility and the exchange rate regime," Working Paper, Federal Reserve Bank of Atlanta 97-16, Federal Reserve Bank of Atlanta.
  24. Bhattacharya, Sudipto & Boot, Arnoud W A & Thakor, Anjan V, 1998. "The Economics of Bank Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(4), pages 745-70, November.
  25. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  26. Greenwood, Jeremy & Jovanovic, Boyan, 1988. "Financial Development, Growth, And The Distribution Of Income," Working Papers, C.V. Starr Center for Applied Economics, New York University 88-12, C.V. Starr Center for Applied Economics, New York University.
  27. Odedokun, M. O., 1996. "Alternative econometric approaches for analysing the role of the financial sector in economic growth: Time-series evidence from LDCs," Journal of Development Economics, Elsevier, Elsevier, vol. 50(1), pages 119-146, June.
  28. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers, Federal Reserve Bank of Minneapolis 502, Federal Reserve Bank of Minneapolis.
  29. Jappelli, Tullio & Pagano, Marco, 1992. "Saving, Growth and Liquidity Constraints," CEPR Discussion Papers, C.E.P.R. Discussion Papers 662, C.E.P.R. Discussion Papers.
  30. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(3), pages 717-37, August.
  31. Allen, Franklin & Gale, Douglas, 2000. "Optimal currency crises," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 53(1), pages 177-230, December.
  32. Franklin Allen & Douglas Gale, 1976. "Optimal Financial Crises," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 97-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  33. Cooper, Russell & Ross, Thomas W., 1998. "Bank runs: Liquidity costs and investment distortions," Journal of Monetary Economics, Elsevier, Elsevier, vol. 41(1), pages 27-38, February.
  34. Demirguc, Asli & Detragiache, Enrica, 2000. "Monitoring Banking Sector Fragility: A Multivariate Logit Approach," World Bank Economic Review, World Bank Group, World Bank Group, vol. 14(2), pages 287-307, May.
  35. Saint-Paul, G., 1990. "Technological Choice, Financial Markets and Economic Development," DELTA Working Papers, DELTA (Ecole normale supérieure) 90-30, DELTA (Ecole normale supérieure).
  36. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 124, University of Rochester - Center for Economic Research (RCER).
  37. Benhabib, Jess & Spiegel, Mark, 1997. "Cross-Country Growth Regressions," Working Papers, C.V. Starr Center for Applied Economics, New York University 97-20, C.V. Starr Center for Applied Economics, New York University.
  38. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  39. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1371-95, November.
  40. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(3), pages 513-542, December.
  41. Benhabib, Jess & Spiegel, Mark M, 2000. " The Role of Financial Development in Growth and Investment," Journal of Economic Growth, Springer, Springer, vol. 5(4), pages 341-60, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Jean-Pierre Allegret & Sana Azzabi, 2012. "Développement financier, croissance de long terme et effets de seuil," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(5), pages 553-581, December.
  2. Alejandro Gaytán González & Romain Ranciere, 2005. "Banks, Liquidity Crises and Economic Growth," Working Papers, Banco de México 2005-03, Banco de México.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bge:wpaper:191. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruno Guallar).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.