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Financial Deepening and Economic Growth

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  • Bhattarai, Keshab

Abstract

A Venn diagram is used to show the efficient allocation of resources in terms of the core of Shapley-Shubik games and general equilibrium models. These concepts are applied to study the role of real finance in growth with and endogenous, cash in advance, money in utility function and applied dynamic general equilibrium model of Germany, France and UK. Computations of the general equilibrium model confirms the over financing hypothesis. The actual financial deepening was 3.5, 2.4 and 5.1 times more than optimal financial deepening for France, Germany and the UK respectively. This explains the wide-spread impacts of financial crises on growth and employment in these economies that was observed after the 2008 recessions. Shocks in financial deepening ratio cause massive macroeconomic fluctuations. Smooth and sustainable growth of the economy requires adoptions of the separating equilibrium in line of Miller-Stiglitz-Roth mechanisms to avoid the problem of asymmetric information in process of financial intermediation.

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  • Bhattarai, Keshab, 2013. "Financial Deepening and Economic Growth," MPRA Paper 48696, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:48696
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    Cited by:

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    2. Tarna Silue, 2021. "Financial Inclusion and Economic Growth : Evidence in the Digital Environment of Developing Countries," Working Papers hal-03281843, HAL.
    3. Qichun He, 2016. "Do Political Factors Cause the Regional Inequality in the Reform-Era China?," Review of Development Economics, Wiley Blackwell, vol. 20(2), pages 387-398, May.
    4. Pradhan, Rudra & Arvin, Mak & Norman, Neville & Bahmani, Sahar, 2020. "The dynamics of bondmarket development, stockmarket development and economic growth: Evidence from the G-20 countries," Journal of Economics, Finance and Administrative Science, Universidad ESAN, vol. 25(49), pages 119-147.
    5. Raihan, Selim & Osmani, S. R. & Khalily, M. A. Baqui, 2017. "The Macro Impact of Microfinance in Bangladesh: A CGE Analysis," Conference papers 332868, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    6. Keshab Bhattarai, 2016. "Growth and Income Distributions in Four EU Economies," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 22(3), pages 263-277, August.
    7. Keshab Bhattarai, 2017. "Welfare and Distributional Impacts of Financial Liberalization in an Open Economy: Lessons from a Multi-Sectoral Dynamic CGE Model for Nepal," International Business Research, Canadian Center of Science and Education, vol. 10(1), pages 181-198, January.
    8. Keshab Raj Bhattarai & Sushanta K. Mallick, 2015. "Macroeconomic policy coordination in the global economy: VAR and BVAR-DSGE analyses," EcoMod2015 8610, EcoMod.
    9. Keshab Bhattarai, 2015. "Financial deepening and economic growth," Applied Economics, Taylor & Francis Journals, vol. 47(11), pages 1133-1150, March.
    10. Xinxin Wang & Jingjing Hong & Pengpeng Fan & Shidan Xu & Zhixian Chai & Yubo Zhuo, 2021. "Is China’s urban–rural difference in population aging rational? An international comparison with key indicators," Growth and Change, Wiley Blackwell, vol. 52(3), pages 1866-1891, September.
    11. Raihan, Selim & Osmani, S.R. & Khalily, M.A. Baqui, 2017. "The macro impact of microfinance in Bangladesh: A CGE analysis," Economic Modelling, Elsevier, vol. 62(C), pages 1-15.
    12. Shangmei Zhao & Jiang He & Haijun Yang, 2018. "Population Ageing, Financial Deepening and Economic Growth: Evidence from China," Sustainability, MDPI, vol. 10(12), pages 1-15, December.
    13. Keshab Bhattarai, 2015. "Financial Deepening and Economic Growth in Advanced and Emerging Economies," Review of Development Economics, Wiley Blackwell, vol. 19(1), pages 178-195, February.
    14. Tarna Silue, 2021. "Financial Inclusion and Economic Growth : Evidence in the Digital Environment of Developing Countries," CERDI Working papers hal-03281843, HAL.
    15. Islam, Khan & O’Gorman, Melanie, 2019. "Microcredit contract design: A macroeconomic evaluation," World Development, Elsevier, vol. 124(C), pages 1-1.

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    More about this item

    Keywords

    financial deepening; growth;

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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