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Banking Efficiency and the Economic Transition Process

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  • Nabi, Mahmoud Sami
  • Rajhi, Taoufik

Abstract

This paper investigates the role of the banking system in the economic transition process. This is considered in the context of an overlapping generation model with endogenous growth. There are two production technologies, one for the production of a final good and the other for the production of an investment good. The return of caital invested in the investment good technology is stochastic. Banks collect the saving of households and finance the production of the investment good while respecting some prudential rules. We show that the capital accumulation is constituted of several phases and that the economic transition process depends on the fragility of the financial system defined as the degree of the credit market perfection and the bank’s inefficiency. Hence, efficient banks enables the economy to resist to bad performances of the investment good sector. However, in case of inefficient banks, the situation can degenerate in a confidence crisis in the banking system delaying the economic transition process by several years. We show that this negative impact is more severe when the economy is less developed.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24496.

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Date of creation: Jan 2002
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Handle: RePEc:pra:mprapa:24496

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Keywords: Banking Efficiency; Confidence Crisis; Transition Process;

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  1. Michel Guillard & Taoufik Rajhi, 1994. "Une note sur les liens entre croissance et taux d'intérêt," Revue économique, Presses de Sciences-Po, vol. 0(3), pages 751-766.
  2. Jeremy Greenwood & Boyan Jovanovic, 1989. "Financial Development, Growth, and the Distribution of Income," NBER Working Papers 3189, National Bureau of Economic Research, Inc.
  3. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc.
  4. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 87-114, February.
  5. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
  6. Kiminori Matsuyama, 2001. "Financial Market Globalization and Endogenous Inequality of Nations," Discussion Papers 1334, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Russell Cooper & Dean Corbae, 2001. "Financial collapse and active monetary policy: a lesson from the Great Depression," Staff Report 289, Federal Reserve Bank of Minneapolis.
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