Wealth, financial intermediation and growth

Alejandro Gaytan and Romain Ranciere

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper presents empirical support for the existence of wealth effects in the contribution of financial intermediation to economic growth, and offers a theoretical explanation for these effects. Using GMM dynamic panel data techniques applied to study the growth-promoting effects of financial intermediation, we show that the exogenous contribution of financial development on economic growth has different effects for different levels of income per capita. We find that this contribution is generally increasing with the level of income per capita of the economy, up to a relatively high level of income. This contribution is consistently lower for poor countries; and for some low levels of income per capita it can be negative. We provide a model to account for these wealth effects. The model is a overlapping generations growth model where financial intermediaries implement liquidity risk sharing among depositors. We show that at early stages of economic development, a bank can increase welfare of its depositors only at the cost of lowering investment and growth. However, once the economy has crossed certain wealth threshold, the liquidity role of banks becomes unambiguously growth enhancing. As wealth increases, banks offer improving liquidity insurance, and higher growth; however, for high levels of wealth, growth generated by financial intermediation declines as the economy attains the optimal level of consumption risk sharing.

Keywords: Financial development; economic growth; OLG growth models; liquidity; financial intermediation (search for similar items in EconPapers)
JEL-codes: E44 G21 O16 O40 (search for similar items in EconPapers)
Date: 2004-01, Revised 2004-04
New Economics Papers: this item is included in nep-dev, nep-dge, nep-fin, nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
https://econ-papers.upf.edu/papers/851.pdf Whole Paper (application/pdf)

Related works:
Working Paper: Wealth Financial Intermediation and Growth (2005)
Working Paper: Wealth, Financial Intermediation and Growth (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:851

Access Statistics for this paper

More papers in Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).