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Interactions between Financial Development and Economic Growth: Theoretical Approaches and Solutions

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    In synthesis, the study presents the principal theoretical directions and empirical analyses of the interaction between financial development and economic growth, of the financial system structuring and its major functions with respect to the real economy. The study makes a critical reconsideration of the most important premises contained in economic theory and the empirical analyses held thus far. The views concerning the direction of causality have been interpreted in the sense that they reflect the two sides of a single interconnection and that they are mutually complementary, the implicit assumption being that the effect can also be reversed or can be of a two-way nature. The dichotomy of the various theoretical conceptions about the financial structure has been analyzed, including both concepts – those based on markets and those based on banks. The theoretical scheme has been enlarged by the addition of the concept about the structuring of a financial system on the basis of the services it renders and by including its legal framework. The study upholds the understanding that financial markets and financial intermediaries can simultaneously, in parallel, and to various degrees affect the development of the real sector of the economy. The study has also made a systematization of the major functions of the financial system, and has outlined the specific methods, through which financial development contributes to curbing the market failures and encourages economic growth, commenting at the same time on the inherent limitations of their empirical explication.

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    Article provided by Bulgarian Academy of Sciences - Economic Research Institute in its journal Economic Studies.

    Volume (Year): (2009)
    Issue (Month): 3 ()
    Pages: 55-79

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    Handle: RePEc:bas:econst:y:2009:i:3:p:55-79
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