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Threshold Effect and Financial Intermediation in Economic Development

  • Augier, Laurent
  • Soedarmono, Wahyoe
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    This paper analyzes the theoretical finance-growth nexus. Using the Neoclassical growth framework, we raise a new issue where our finance-growth nexus has multiple stationary states with threshold effect. Threshold effect prevents the economy to reach long-run steady state equilibrium of capital and hence financial economists in developing countries should be aware of such an impediment. We show that the development of banking sector should be more supported than financial market, since banking sector is better than financial market in order to reduce threshold effect and ensure the existence and uniqueness of a higher long-run steady state equilibrium of capital stock.

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    File URL: https://mpra.ub.uni-muenchen.de/20494/1/MPRA_paper_20494.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20494.

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    Date of creation: 05 Feb 2010
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    Handle: RePEc:pra:mprapa:20494
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    1. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
    2. Koetter, Michael & Wedow, Michael, 2006. "Finance and growth in a bank-based economy: is it quantity or quality that matters?," Discussion Paper Series 2: Banking and Financial Studies 2006,02, Deutsche Bundesbank, Research Centre.
    3. Hasan, Iftekhar & Koetter, Michael & Wedow, Michael, 2007. "The quality of banking and regional growth," Discussion Paper Series 2: Banking and Financial Studies 2007,10, Deutsche Bundesbank, Research Centre.
    4. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
    5. Berger, Allen N. & Bonaccorsi di Patti, Emilia, 2006. "Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1065-1102, April.
    6. Enrica Detragiache & Asli Demirgüç-Kunt, 1998. "Financial Liberalization and Financial Fragility," IMF Working Papers 98/83, International Monetary Fund.
    7. Deidda, Luca & Fattouh, Bassam, 2002. "Non-linearity between finance and growth," Economics Letters, Elsevier, vol. 74(3), pages 339-345, February.
    8. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2002. "Funding growth in bank-based and market-based financial systems: evidence from firm-level data," Journal of Financial Economics, Elsevier, vol. 65(3), pages 337-363, September.
    9. 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.
    10. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
    11. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    12. Ross Levine & Sara Zervos, . "Stock markets, banks and economic growth ," CERF Discussion Paper Series 95-11, Economics and Finance Section, School of Social Sciences, Brunel University.
    13. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
    14. Bhide, Amar, 1993. "The hidden costs of stock market liquidity," Journal of Financial Economics, Elsevier, vol. 34(1), pages 31-51, August.
    15. Bencivenga Valerie R. & Smith Bruce D. & Starr Ross M., 1995. "Transactions Costs, Technological Choice, and Endogenous Growth," Journal of Economic Theory, Elsevier, vol. 67(1), pages 153-177, October.
    16. Levine, Ross, 1991. " Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-65, September.
    17. 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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