nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2007‒09‒02
two papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Financial Intermediaries, Markets, and Growth By Falko Fecht; Kevin X.D. Huang; Antoine Martin
  2. Finance for Growth: Does a Balanced Financial Structure Matter? By Lucía Cuadro-Sáez; Alicia García-Herrero

  1. By: Falko Fecht (Deutsche Bundesbank); Kevin X.D. Huang (Department of Economics, Vanderbilt University); Antoine Martin (Federal Reserve Bank of New York)
    Abstract: We build a model in which financial intermediaries provide insurance to households against idiosyncratic liquidity shocks. Households can invest in financial markets directly if they pay a cost. In equilibrium, the ability of intermediaries to share risk is constrained by the market. From a growth perspective, this can be beneficial because intermediaries invest less in the productive technology when they provide more risk-sharing. Our model predicts that bank-oriented economies can grow more slowly than more market-oriented economies, which is consistent with some recent empirical evidence. We show that the mix of intermediaries and markets that maximizes welfare under a given level of financial development depends on economic fundamentals.
    Keywords: Financial intermediaries, financial markets, risk-sharing, Growth <br><br>
    JEL: E44 G10 G20
    Date: 2007–08
  2. By: Lucía Cuadro-Sáez; Alicia García-Herrero
    Abstract: In this paper we explore empirically a long-standing question in the literature on finance for growth. namely whether the financial structure -in terms of the size of the banking system relative to the capital markets- matters for economic growth. We build upon the existing literature by constructing a new measure of the "balancedness" of the financial structure which is broader, as it includes the domestic bond market as well as external sources of financing. It is also bounded and more linear than existing ones We find that a more balanced financial structure -in terms of the size of banks relative to the capital markets- is associated with higher economic growth. Such finding points to banks and capital markets being more of a complement than a substitute. This is in with Greenspan's idea of one market serving as "spare wheel" of the other.
    Keywords: financial structure, banking system, capital markets, economic growth
    JEL: O16 G15 G21
    Date: 2007–07

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