Financial Development, Growth, and the Distribution of Income

Abstract

A paradigm is presented where both the extent of financial intermediation and the rate of economic growth are endogenously determined.Financial intermediation promotes growth because it allows a higher rate of return to be earned on capital, and growth in turn provides the means to implement costly financial structures.Thus, financial intermediation and economic growth are inextricably linked in accord with the Goldsmith-McKinnon-Shaw view on economic development. The model also generates a development cycle reminiscent of the Kuznets hypothesis. In particular, in the transition from a primitive slow-growing economy to a developed fast-growing one, a nation passes through a stage where the distribution of wealth across the rich and poor widens. *Greenwood, Federal Reserve Bank of Minneapolis and University of Western Ontario; Jovanovic, New York University.The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. This paper is preliminary and is circulated to stimulate discussion. It is not to be quoted without authors' permission. J J J J J walk with positive drift, since E[&i(0.(0.+ e.) + (1-0:)*)] + 61 P > 0 for a11 <f>\ e l 0 . 1 ] b y J J J J J assumptions (A) and (B). Thus, k t must become absorbed into the set [k~,co) with probability one. For more detail see Feller (1971).

Regional Economic Disparity, Financial Disparity, and National Economic Growth: Evidence from China

“…Many studies have investigated the effect of financial development on economic growth. Greenwood and Jovanovic (1990), Bencivenga and Smith (1991), Levine (1997), Saint‐Paul (1992), and Devereux and Smith (1994) have built models and explained how financial development affects economic growth. King and Levine (1993), Demetriades and Hussein (1996), Beck et al (2004), and Levine et al (2000) used empirical analyses showing that financial development has an effect on economic growth in different countries.…”

Finance and Growth: New Evidence on the Role of Insurance

“…The importance of financial intermediaries for economic growth has been emphasised in several theoretical models (see e.g. Pagano, 1993; King and Levine, 1993b; and Greenwood and Jovanovic, 1990). These models postulate that well‐functioning financial intermediaries ameliorate information and transaction costs, and in so doing promote efficient allocation of resources, leading to the expansion of the economy.…”

“…By channelling saving to the productive sector, it boosts capital accumulation and output growth. On the other hand, the productivity channel is based upon recent endogenous growth models (Greenwood and Jovanovic, 1990; King and Levine, 1993b), which emphasise the role of the financial sector ability in financing innovative activities. In particular, the model by King and Levine (1993b) emphasises risk diversification as a channel via which financial intermediaries can accelerate technological change and economic growth.…”

Financial Development, Financial Structure and Income Inequality in China

“…Among these macroeconomic reforms, the expansion and liberation of the financial sectors to escape the state of ‘financial repression’ have been prominent. As an important means of resource allocation, except for promoting social investment and economic growth, financial development can have some direct impacts on income distribution by affecting the economic opportunities of individuals, such as investing in human capital to attain a good job and start a new business (Greenwood and Jovanovic, ; Banerjee and Newman, ; Galor and Zeira, ; Beck et al., ). Meanwhile, it also exerts some indirect impacts on income inequality by promoting economic growth and the allocation of credit to chosen industrial sectors, which alters the relative demands of high‐skilled and low‐skilled workers (Gine and Townsend, ; Townsend and Ueda, ; Demirgüç‐Kunt and Levine, ).…”