A paradigm is presented where both the extent of financial intermediation
and the rate of economic growth are endogenously determined. Financial
intermediation promotes growth because it allows a higher rate of return to be
earned on capital, and growth in turn provides the means to implement costly
financial structures. Thus, financial intermediation and economic growth are
inextricably linked in accord with the Goldsmith-McKinnon-Shaw view on economic
development. The model also generates a development cycle reminiscent of the
Kuznets hypothesis. In particular, in the transition from a primitive slowgrowing
economy to a developed fast-growing one, a nation passes through a
stage where the distribution of wealth across the rich and poor widens.
*Published:
Journal of Political Economy, Vol. 98, No. 5, Pt. 1, pp. 1076-1107, (October 1990).
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