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Financial Intermediation and Growth: Long Run Consequences of Capital Market Imperfections

Thierry Tressel ()

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: The model describes an economy in which banks develop in order to meet the entrepreneurs' demand of capital. Domestic savers can lend in the informal credit market where they have to bear some risk; they can also save in a safe bank account. Banks cannot perfectly check the choices of borrowers, hence they ask for a collateral. Therefore, small firms borrow in the informal market where costly information can be obtained. The long run steady state is determined by the initial distribution of wealth and aggregate wealth. The economy may eventually stop growing, and the banking system will fail to develop. Alternatively, banks may progressively dominate the financial system and the economy will reach a stable positive rate of growth.

Date: 1999-04-01
New Economics Papers: this item is included in nep-cfn, nep-ent and nep-mfd
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