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On the real effects of financial development

We study a simple mode of financial and economic development based on consumption of real resources by the financial sector and constant returns to scale in accumulation of physical capital in the production secto. Transition from financial intermediation and firm-production is associated with a process of reallocation of resources towards more productive investiments and financial services. We find that the immediate growth impact of financial development is ambiguous - transition might lead to a periode of output decline. Redistibution policies which do not alter the timing of the transition imposed by the market forces could be not enough to offset the possible negative-growth effects associated with the transition process, and to prevent povertry traps possibly associated with premature emergence of financial intermediation.

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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 200010.

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Date of creation: 2000
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Handle: RePEc:cns:cnscwp:200010
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  1. Jappelli, Tullio & Pagano, Marco, 1999. "The Welfare Effects of Liquidity Constraints," Oxford Economic Papers, Oxford University Press, vol. 51(3), pages 410-30, July.
  2. Arestis, Philip & Demetriades, Panicos O, 1997. "Financial Development and Economic Growth: Assessing the Evidence," Economic Journal, Royal Economic Society, vol. 107(442), pages 783-99, May.
  3. Delano Villanueva & Abbas Mirakhor, 1990. "Strategies for Financial Reforms: Interest Rate Policies, Stabilization, and Bank Supervision in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 37(3), pages 509-536, September.
  4. Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus unbound by chance? Risk, diversification and growth," Economics Working Papers 98, Department of Economics and Business, Universitat Pompeu Fabra.
  5. anonymous, 1998. "Financial intermediation and growth," Economics Update, Federal Reserve Bank of Atlanta, issue Jan, pages 4.
  6. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  7. Jappelli, Tullio & Pagano, Marco, 1992. "Saving, Growth and Liquidity Constraints," CEPR Discussion Papers 662, C.E.P.R. Discussion Papers.
  8. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
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