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Threshold Effect and Financial Intermediation in Economic Development

  • Soedarmono, Wahyoe
  • Augier, Laurent

This paper analyzes the importance of financial intermediation on economic growth. Using the Neoclassical growth framework, we raise a new issue where our model has multiple stationary states with threshold effect. We further confirm that financial intermediation is better than self-financing system in order to ensure the existence and uniqueness of long-run steady state equilibrium of capital stock, as well as to decrease threshold level. The presence of threshold effect is an important finding in studying the finance-growth nexus, since it prevents the economy to raise sufficient initial capital.

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File URL: http://mpra.ub.uni-muenchen.de/14905/1/MPRA_paper_14905.pdf
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File URL: http://mpra.ub.uni-muenchen.de/20405/1/MPRA_paper_20405.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14905.

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Date of creation: 28 Apr 2009
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Handle: RePEc:pra:mprapa:14905
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  11. Demirguc-Kent, Asli & Detragiache, Enrica, 1998. "Financial liberalization and financial fragility," Policy Research Working Paper Series 1917, The World Bank.
  12. Hung, Fu-Sheng & Cothren, Richard, 2002. "Credit market development and economic growth," Journal of Economics and Business, Elsevier, vol. 54(2), pages 219-237.
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  15. Levine, Ross & Zervos, Sara, 1996. "Stock markets, banks, and economic growth," Policy Research Working Paper Series 1690, The World Bank.
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  23. Azariadis, Costas & Smith, Bruce, 1998. "Financial Intermediation and Regime Switching in Business Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 516-36, June.
  24. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
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