Financial frictions, financial market development, and macroeconomic development

Abstract

ABSTRACT This paper reviews the state of knowledge on the impact of financial frictions and financial underdevelopment on firms. The focus is on their aggregate and distributional consequences for the macroeconomies of developing countries. It then reviews available data and data needs for future progress and proposes an agenda of important but unanswered questions for informing our understanding of growth and policy. Various questions involve ways to promote financial development itself, guide second-best policies in the face of financial frictions that enable macro development, and develop an inclusive financial system that benefits all.