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Finance and growth: a synthesis and interpretation of the evidence

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  • Alexander Galetovic

Abstract

Evidence is reviewed suggesting that: (a) in market economies financial systems develop and attain maturity during the early stages of industrialization; (b) frictions caused by asymmetric information and the incompleteness of contracts are important in credit markets, and intermediaries play an important role in overcoming them; (c) for a large cross-section of countries financial indicators correlate positively with growth. It is argued that financial intermediaries matter for growth because they moderate the negative effects of incentive frictions, thereby reducing the costs of financing the accumulation of intangible assets like commercial and technical knowledge.

Suggested Citation

  • Alexander Galetovic, 1994. "Finance and growth: a synthesis and interpretation of the evidence," International Finance Discussion Papers 477, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:477
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    References listed on IDEAS

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    Cited by:

    1. Allen, Franklin & Gale, Douglas, 1995. "A welfare comparison of intermediaries and financial markets in Germany and the US," European Economic Review, Elsevier, vol. 39(2), pages 179-209, February.
    2. Andres, Javier & Hernando, Ignacio & Lopez-Salido, J. David, 2004. "The role of the financial system in the growth-inflation link: the OECD experience," European Journal of Political Economy, Elsevier, vol. 20(4), pages 941-961, November.
    3. Zsolt Becsi & Ping Wang & Mark A. Wynne, 1998. "Endogenous market structures and financial development," FRB Atlanta Working Paper 98-15, Federal Reserve Bank of Atlanta.
    4. Galetovic, Alexander, 1996. "Specialization, intermediation, and growth," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 549-559, December.
    5. Jith Jayaratne & Philip E. Strahan, 1995. "The finance-growth nexus: evidence from bank branch deregulation," Research Paper 9513, Federal Reserve Bank of New York.

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