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Interaction between Economic and Financial Development

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  • L. Deidda

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Abstract

This paper presents a possible explanation of the interactive nature of the relationship between economic and financial development based on absorption of resources by the financial sector, and constant returns to physical capital accumulation in the production sector. Financial intermediaries operating in a credit market characterised by monopolistic competition emerge along with the process of economic development. This could initially have a detrimental effect on growth, so that the economy might be trapped in a low development region. If not, subsequent economic develop-ment stimulates competition among financial intermediaries which results in more e¢cient …nancial transactions, and therefore higher growth. While higher e¢ciency is always associated with higher growth, the laissez faire economy can still be characterised by sub-optimal levels of financial development.

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Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 199913.

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Date of creation: 1999
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Handle: RePEc:cns:cnscwp:199913

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  1. Aubhik Khan, 1999. "Financial development and economic growth," Working Papers 99-11, Federal Reserve Bank of Philadelphia.
  2. F Zilibotti, 1993. "Endogenous Growth and Intermediation in an Archipelago Economy," CEP Discussion Papers, Centre for Economic Performance, LSE dp0167, Centre for Economic Performance, LSE.
  3. 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.
  4. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 35(2), pages 688-726, June.
  5. L. Deidda & B. Fattouh, 2001. "Non linearity between finance and growth," Working Paper CRENoS 200104, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  6. Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series, The World Bank 2059, The World Bank.
  7. 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.
  8. Panicos O. Demetriades & Khaled A.Hussein, 1995. "Does Financial Development Cause Economic Growth? Time-Series Evidence from 16 Countries," Keele Department of Economics Discussion Papers (1995-2001), Department of Economics, Keele University 95/13, Department of Economics, Keele University.
  9. Gary D. Hansen & Edward C. Prescott, 2002. "Malthus to Solow," American Economic Review, American Economic Association, American Economic Association, vol. 92(4), pages 1205-1217, September.
  10. Harris, Richard D. F., 1997. "Stock markets and development: A re-assessment," European Economic Review, Elsevier, Elsevier, vol. 41(1), pages 139-146, January.
  11. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 559-86, June.
  12. Xu, Zhenhui, 2000. "Financial Development, Investment, and Economic Growth," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 38(2), pages 331-44, April.
  13. 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).
  14. Bruce D. Smith & John H. Boyd, 1998. "The evolution of debt and equity markets in economic development," Economic Theory, Springer, Springer, vol. 12(3), pages 519-560.
  15. Gerardo della Paolera and Alan M. Taylor., 1997. "Finance and Development in an Emerging Market: Argentina in the Interwar Period," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C97-089, University of California at Berkeley.
  16. Saint-Paul, G., 1990. "Technological Choice, Financial Markets and Economic Development," DELTA Working Papers, DELTA (Ecole normale supérieure) 90-30, DELTA (Ecole normale supérieure).
  17. Sussman, Oren & Zeira, Joseph, 1995. "Banking and Development," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1127, C.E.P.R. Discussion Papers.
  18. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, Elsevier, vol. 37(2-3), pages 613-622, April.
  19. anonymous, 1998. "Financial intermediation and growth," Economics Update, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Jan, pages 4.
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Cited by:
  1. Herwartz, Helmut & Walle, Yabibal M., 2014. "Determinants of the link between financial and economic development: Evidence from a functional coefficient model," Economic Modelling, Elsevier, Elsevier, vol. 37(C), pages 417-427.
  2. R. Naylor, 2001. "Industry profits and market size under bilateral oligopoly," Working Paper CRENoS 200108, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  3. Enrico Berkes & Ugo Panizza & Jean-Louis Arcand, 2012. "Too Much Finance?," IMF Working Papers, International Monetary Fund 12/161, International Monetary Fund.
  4. Eggoh C. Jude, 2010. "Financial Development And Growth: A Panel Smooth Regression Approach," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, Chung-Ang Unviersity, Department of Economics, vol. 35(1), pages 15-33, March.
  5. Lu, Shu-Shiuan, 2013. "The role of capital market efficiency in long-term growth: A quantitative exploration," Journal of Macroeconomics, Elsevier, Elsevier, vol. 36(C), pages 161-174.
  6. Huang, Ho-Chuan & Lin, Shu-Chin & Kim, Dong-Hyeon & Yeh, Chih-Chuan, 2010. "Inflation and the finance-growth nexus," Economic Modelling, Elsevier, Elsevier, vol. 27(1), pages 229-236, January.
  7. Cheng, Su-Yin, 2012. "Substitution or complementary effects between banking and stock markets: Evidence from financial openness in Taiwan," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 22(3), pages 508-520.
  8. C. Antonelli & R. Marchionatti & S. Usai, 2000. "Productivity and External Knowledge: The Italian Case," Working Paper CRENoS 200009, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  9. M. Musumeci, 2000. "Innovazione tecnologica e beni culturali. Uno studio sulla situazione della Sicilia," Working Paper CRENoS 200008, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  10. LR. Keller & E. Strazzera, 2000. "Examining predictive models among discounting models," Working Paper CRENoS 200005, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  11. Kar, Muhsin & NazlIoglu, Saban & AgIr, Hüseyin, 2011. "Financial development and economic growth nexus in the MENA countries: Bootstrap panel granger causality analysis," Economic Modelling, Elsevier, Elsevier, vol. 28(1-2), pages 685-693, January.
  12. R. Naylor, 2001. "Firm profits and the number of firms under unionised oligopoly," Working Paper CRENoS 200109, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  13. Kim, Dong-Hyeon & Lin, Shu-Chin, 2011. "Nonlinearity in the financial development–income inequality nexus," Journal of Comparative Economics, Elsevier, vol. 39(3), pages 310-325, September.

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