Financial Development and Economic Growth: Views and Agenda
This paper attempts to explain the relationship between financial structure and the functioning of the financial system. The author suggests that financial instruments, markets, and institutions arise to mitigate the effects of information and transaction costs.
The author advocates a functional approach towards understanding the role of financial systems in economic growth. This approach focuses on the ties between growth and the quality of the functions provided by the financial system.
The author states that the financial systems should:
- Facilitate the trading, hedging, diversifying, and pooling of risk;
- Allocate resources;
- Monitor managers and exert corporate control;
- Mobilize savings;
- Facilitate the exchange of goods and services.
The paper explores:
- The relationship between financial structure and the functioning of the financial system;
- Association of financial development and structure to economic growth rates;
- Change on financial structure with the country's development and its variance across countries.
The author concludes that empirical analyses demonstrate a strong positive link between the functioning of the financial system and the long-run economic growth. He however, opines that there will not be a sufficient understanding of long-run economic growth until the evolution and functioning of financial systems is understood.
