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Interaction between economic and financial development

Deidda, Luca Gabriele (2006) Interaction between economic and financial development. Journal of Monetary Economics, Vol. 53 (2), p. 233-248. ISSN 0304-3932. Article.

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DOI: 10.1016/j.jmoneco.2005.03.007


This paper presents a model of financial and economic development which assumes the consumption of real resources by the financial sector. Financial development occurs endogenously as the economy reaches a critical threshold of economic development. Compared to financial autarky, financial intermediaries allocate savings, net of their costs of operation, to more productive investments. Whenever the technology financed by intermediaries is more capital-intensive than that operated in financial autarky, the growth effect of financial development is ambiguous. As a result, financial development may be unsustainable. However, when financial development is sustainable, the credit market becomes more competitive and more efficient over time, and this could eventually contribute to economic growth. Nonetheless, given monopolistic competition in the financial sector, the level of entry into the credit market is generally inefficient. For instance, with diminishing returns to specialisation, entrants might be too few at the early stages of economic development and too many later on.

Item Type:Article
ID Code:2946
Uncontrolled Keywords:Financial autarky, financial intermediation, economic growth, transition, lending technology
Subjects:Area 13 - Scienze economiche e statistiche > SECS-P/01 Economia politica
Divisions:002 Altri enti e centri di ricerca del Nord Sardegna > CRENoS-Centro Ricerche Economiche Nord Sud, Università di Cagliari e Università di Sassari
001 Università di Sassari > 01 Dipartimenti > Economia, impresa, regolamentazione
Additional Information:Già pubblicato in: Working papers CRENoS, 1999, 13.
Deposited On:09 Sep 2009 12:51

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