Financial market economy vs self-financing economy and the role of risk aversion

Laurent Augier and Chao Yin
Authors registered in the RePEc Author Service: Romain Houssa and Xavier Debrun

International Economics, 2022, issue 172, 15-28

Abstract: This paper revisits the thesis of Levine (1991) on the positive contribution of the financial market on the rate of economic growth. According to the author, the stock market performs, because it facilitates the formation of capital by increasing the liquidity of the market. In contrast, the economy private financial markets would be less effective. Such a conclusion is yet far from obvious. From the model of Levine (1991), we examine the equilibrium proportion invested in high-return (illiquid) projects and we show that the self-financing economy can record a growth rate higher than that of the economy of financial markets. Regardless of the stock market, economic growth is related to the interactions between the aversion to risk and the parameters of the set of production.

Keywords: Economic development; Financial markets; Risk aversion (search for similar items in EconPapers)
JEL-codes: D15 E20 O16 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepiie:2022-q3-172-19

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