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Finance and Growth: theory and evidence

Michele FaggionElisabetta MingardoRoberto Puglisi

International Economics and Finance – 30/11/2011

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Finance and Growth: theory and evidence

Part 1

Introduction Part 2

Influence of financial development

on economic growth Part 3

Bank-based system vs. Marked

based system: pros and cons Part 4

Econometric approaches Part 5

Conclusions

Index

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1. Introduction2. Influence of financial development on economic growth3. Bank-based system vs. Marked-based system: pros and cons4. Econometric approaches5. Conclusions

Part 1

+Introduction

“Where enterprise leads, finance follows” (Robinson, 1952)

“[The idea] that financial markets contribute to economic growth is a proposition too obvious for serious discussion” (Miller, 1998)

Is finance a determinant of economic growth? There are different positions among economists

on the relationship between finance and economic growth.

Research clarifies the role of finance in economic growth will have policy implications and shape policy-oriented research.

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1. Introduction2. Influence of financial development on economic growth3. Bank-based system vs. Marked-based system: pros and cons4. Econometric approaches5. Conclusions

Part 2

+Influence of financial development on economic growth The development of financial instruments,

markets and institutions can ameliorate market frictions, change the incentives and constrints facing economic agents.

The issue is determine whether financial system can positively affect saving rates, investment decisions, tecnological innovations and, hence, long-term economic growth.

+Financial Functions

We’ll analyse the main functions provided by the financial system:1) Producing information and allocating capital2) Monitoring investments and exerting corporate

governance3) Diversification and risk management4) Mobilizing and pooling savings.5) Easing the exchange of goods and services.

+Financial Functions

There are huge information costs to sustain before making an investment decision (evalutating firms, manager and market conditions)

Small savers may not have enought rosources to provide these informations. Since savers will prefer to invest in activities with reliable information and lower risks, high information cost may prevent capital from flowing to more innovative and riskier activities.

For this reason, the development of finacial intermediaries should reduce cost of information and, hance, improve resouce allocation.

1) Producing information and allocating capital

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1. Introduction2. Influence of financial development on economic growth3. Bank-based system vs. Marked-based system: pros and cons4. Econometric approaches5. Conclusions

Part 3

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1. Introduction2. Influence of financial development on economic growth3. Bank-based system vs. Marked-based system: pros and cons4. Econometric approaches5. Conclusions

Part 4

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1. Introduction2. Influence of financial development on economic growth3. Bank-based system vs. Marked-based system: pros and cons4. Econometric approaches5. Conclusions

Part 5

+Conclusioni