Intermediation Growth Research Articles

Optimal Central Bank Areas, Financial Intermediation, and Mexican Dollarization

This paper argues that the most important effects of Mexican dollarization would operate not through the standard ''optimal currency area channels, which involve gains from reducing costs of translating and exchanging currencies, or from stabilization of business cycles. Nor would it operate through possible welfare improvements from dollarization as a commitment device for monetary policy. Instead, it would operate through the effects of dollarization on financial intermediation, investment, and economic growth. In particular, dollarization like adoption of the euro would involve not only a change in the currency used to quote prices, perform accounting, and make transactions, but also a change in the centsul bank (for Mexico), with attendant changes in supervision, regulation, and monetary policies that, by affecting incentives of banks and other financial intermediaries, would affect the amount of financial intermediation and therefore overall investment and growth. Examples drawn from various theories of financial intermediation illustrate how the scale of intermediation can be affected by central bank policies, and how this affects the costs and benefits of dollarization. WHEN ONE NATION CONSIDERS adopting the money of another nation, discussions naturally focus on money. Howevel, that focus may be misplaced if adopting anothel country's money leads ultimately to adoption of its centlal bank and its policies towald financial intermediation. In that case, the most important long-run effects of adopting the money are likely to operate thlough channels of financial intelmediation and its impact on economic growth. Should Mexico adopt the U.S. dollar? The answer to that question involves a wide ange of issues, ranging from the details of the convelsion plocess and its distributive effects,l thlough standard questions of monetary policy, to significantly bloader

Financial intermediation and economic growth in developing countries

Presents a model that is suitable for evaluating not only the total effects of financial intermediation on economic growth, but also the channels through which the effects are brought about. These two channels are: the externality of financial on the real sector and the inter‐sectoral differential between financial and real sectors in the productivity of factors of production. Also presented is the conventional and rather ad hoc model for evaluating the effect of financial intermediation on economic growth. All the models were estimated with cross‐sectional data over the 1970s and 1980s for 90 developing countries and the main findings are that: financial intermediation exerts positive effects on economic growth in developing countries; the two postulated channels of the effects of financial intermediation are both relevant in developing countries; and financial depth, defined as the ratio of financial aggregates to GDP, promotes economic growth in only low‐income developing countries while it has no effect in high‐income ones.

Financial intermediation under information asymmetry: implications for capital market efficiency in selected developing countries

Considers the methods whereby income is likely to grow in developing countries, given imperfect information and the need for credit for investment. Looks at the link between financial intermediation and economic growth for nine countries between 1969 and 1992, using a financial intermediation model, comparing demand‐following and supply‐leading financial linkages. Finds that financial structure variables explain income growth better than investment variables in five countries ; demand‐following intermediation fitted two countries better; and the supply‐leading channel fitted three countries better. Concludes that financial intermediaries mobilize domestic resources for economic growth in several countries.

Financial intermediation and economic growth in Southern Africa

Using various indicators of financial development, this paper investigates the role of financial intermediation in stimulating economic growth in Southern Africa. The results lend some support to the hypothesis that financial development is positively correlated with the growth rate of real per capita GDP. This relationship is more evident in regressions that use pooled data (5-year cross-sections) than those using annual data. This finding suggests that the finance-growth nexus is a long-run phenomenon. The data indicate that while Botswana and Mauritius are catching up with South Africa towards a high-income steady state, the rest of the countries are stagnating to low income levels and low growth rates.

The Effects of Asymmetric Information on Economic Growth

It has been widely recognized that asymmetric information affects investment, and investment is of course in turn important to economic growth. Knowledge of the mechanisms by which asymmetric information affects economic growth, however, appears incomplete. There are two types of asymmetric information, namely, hidden information and hidden action [1]. Although Azariadis and Smith have studied how hidden information (adverse selection) may affect economic growth with a monetary growth model [3] and a non-monetary growth model [2], the effects of hidden action and costly state verification have been ignored. There have been many studies which at least suggest links between asymmetric information and economic growth. Diamond [6], Boyd and Prescott [5], and Williamson [16]' show that asymmetric information between borrowers and lenders gives rise to financial intermediation. Diamond [6] and Williamson [16] show how financial intermediation can promote economic growth by reducing monitoring costs and channeling funds to the most efficient users. Greenwood and Jovanovic [9] show how collection and analysis of information by financial intermediaries can help investors' resources to flow to the place in the economic system where the funds will yield the highest social return. Bencivenga and Smith [4] show how a reduction of the fraction of savings held in the form of unproductive liquid assets is favorable to capital accumulation and economy growth. While contributing to the literatures of financial intermediation and economic growth greatly, these studies, however, do not specifically examine the relationship of asymmetric information to economic growth. This paper attempts to explore how hidden action (moral hazard) and costly state verification affect economic growth. Hidden action is incorporated into a neoclassical growth model, in which people invest for future consumption, and investment leads to capital accumulation and, thus, economic growth. Borrowers have an informational advantage over lenders ex post concerning the outcome of investment project. Though verification can overcome such asymmetry, it is costly. The results of this paper suggest that the effect of hidden action is to alter the path of economic growth. In the neoclassical growth model without asymmetric information, the economy

Financial markets and growth: An overview

The last five years have witnessed a resurgence of interest in the relationship between financial intermediation and economic growth. This issue had been extensively studied nearly two decades earlier by Goldsmith (1969), McKinnon (1973), Shaw (1973) and others, who produced considerable evidence that financial development correlates with growth. But their work, though insightful, lacked analytical foundations. In traditional growth theory, financial intermediation could be related to the level of the capital stock per worker or to the level of productivity, but not to their respective growth rates. The latter were ascribed to exogenous technical progress. The recent revival of interest in the link between financial development and growth stems mainly from the insights and techniques of endogenous growth models, which have shown that there can be self-sustaining growth without exogenous technical progress and that the growth rate can be related to preferences, technology, income distribution and institutional arrangements. This provides the theoretical underpinning that early contributors lacked: tinancial intermediation can be shown to have not only level effects, but also growth effects. The resulting models have offered important insights into the effect of financial development on growth and vice versa. They have also provided new impetus to empirical research on these issues. This paper reviews the ground covered so far on the theoretical and empirical front and points to some still unresolved issues.

Politics and the economy in Jordan

Introduction Rodney Wilson Resources and Foreign Aid 1. Water Resources and Food Production Hassan A.K. Saleh 2. Foreign Aid and Economic Development Fawzi Khatib The Economy 3. The Role of the Private Sector in Jordan's Economy Zayd Sha'Sha 4. The Demand for Consumer Durables in Jordan Alladin Tileylioglu 5. Jordan's Trade and Balance of Payments Problems Monther Share Institutions 5. Inflation, Financial Intermediation and Economic Growth in Jordan Subrata Ghatak and Fawzi Khatib 7. Islamic Banking in Jordan Rodney Wilson Politics in Jordan 8. Jordan in the 1980's: Entity and Identity Yezid Sayigh 9. Jordan's 1986 Electoral Law Philip J. Robins International Relations 10. The Middle East: An Area of Conflict the Arab-Israeli conflict and the Iran-Iraq War Kamel Abu Jaber 11. Jordan's Foreign Policy Regional and International Implications Saleh A Al-Zu'bi Index

Financial Intermediation and Endogenous Growth

An endogenous growth model with multiple assets is developed. Agents who face random future liquidity needs accumulate capital and a liquid, but unproductive asset. The effects of introducing financial intermediation into this environment are considered. Conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital, causing intermediation to be growth promoting. In addition, intermediaries generally reduce socially unnecessary capital liquidation, again tending to promote growth.

Military Expenditures and Economic Growth in Less Developed Countries: An Augmented Model and Further Evidence

A study of the impact of military expenditures on economic growth and development examines the differences in the results of previous studies which led to contradictory conclusions. The authors find that these differences are due to sample variations, specificational choices, and the different time periods examined. The data indicate that there is no consistent, statistically significant connection between military spending and economic growth. Augmentation of the models suggests that military expenditures neither help nor hurt economic growth to any significant extent. 2 tables.

Financial intermediation and economic growth in less‐developed countries: A theoretical approach

In stressing the importance of financial intermediation in the development of the LDCs, neither the approach of financial deepening nor that of real interest rates has clarified the relationship between financial intermediation and real development. This paper shows—within a two‐sector model, but extendable to the n‐sector case—that high (equilibrium) real interest rates are growth‐promoting, even if total real savings is interest insensitive (a controversial empirical question), because they bring about an improvement in the quality of the capital stock in a well‐defined sense. The analysis also has implications for the theories of inflation and income distribution in the LDCs.

Late Nineteenth-Century American Development: A General Equilibrium History

Preface Part I. The Issues: 1. Late nineteenth-century American development: the issues 2. Counterfactual history Part II. The Framework: 3. A model of late nineteenth-century American regional growth 4. American economic history rewritten: fact or fiction? Part III. The Lessons of History: 5. The Great Depression, 1870-96 6. Financial intermediation, capital immobilities, and economic growth 7. Farmers' discontent and agricultural performance: facts, issues and an agenda 8. Elements of agricultural performance: land expansion and productivity growth 9. Transportation and American development during the Gilded Age: 1870-90 10. Exports, world markets and American development 11. Immigration and American growth Part IV. The Facts of History: Appendix A: parameter estimation Appendix B: the simulation in detail Appendix C: data underlying the analysis of American immigration Notes Bibliography Index.

Financial Development and Economic Growth in Underdeveloped Countries

Publisher Summary This chapter discusses the financial development and economic growth in underdeveloped countries. An observed characteristic of the process of economic development over time, in a market-oriented economy using the price mechanism to allocate resources, is an increase in the number and variety of financial institutions and a substantial rise in the proportion not only of money but also of the total of all financial assets relative to GNP and to tangible wealth. Typical statements indicate that the financial system somehow accommodates—or, to the extent that it malfunctions, it restricts—growth of real per capita output. Such an approach places emphasis on the demand side for financial services; as the economy grows it generates additional and new demands for these services, which bring about a supply response in the growth of the financial system. In this view, the lack of financial institutions in underdeveloped countries is simply an indication of the lack of demand for their services.