Wealth Financial Intermediation and Growth

Romain Ranciere and Gaytán González Alejandro

No 2005-02, Working Papers from Banco de México

Abstract: This paper presents empirical support for the existence non-linear effects in the contribution of financial intermediation to economic growth, and offers a theoretical explanation for these effects. We show that the exogenous contribution of financial development to 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 growth model of financial intermediation to account for these wealth effects. We show that at early stages of economic development, a bank can increase the welfare of its depositors only at the cost of lowering investment and growth. However, once the economy has crossed a certain wealth threshold, the liquidity role of banks becomes unambiguously growth enhancing. However, for high levels of wealth, growth generated by financial intermediation declines as the economy attains the optimal level of consumption risk sharing.

JEL-codes: E44 G21 O16 O40 (search for similar items in EconPapers)
Date: 2005-06
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Wealth, Financial Intermediation and Growth (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bdm:wpaper:2005-02

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