Explore the link between Financial Structures and Economic Growth

LECTURE 3

Financial Development: Growth theories and Finance

Outline:

Growth theories we consider: Endogenous Growth model (Romer), Schumpeterian Growth (Aghion, Acemoglu, Robinson etc).

(Growth theories we do not consider: Solow model, Harrod - Domar model, Leontief matrices and many many more).

We relate them to financial development at the macro- and meso-level, with some evidence from transition economies.

Recall: Levine’s 5 functions of the fin. system (Lecture 1) - how they interact with tech. change/ capital accumulation

Endogenous growth: the AK model (Romer)

Major limitations of Neoclassical growth models (Ramsey/ Solow):

· Growth rate determined only by savings rate

· Technological change entirely exogenous

· Predicted convergence between economies not validated empirically.

(Romer (1986, 1990) turns tech. growth into a production input. )

· Does not distinguish between capital accumulation & tech. progress.

· Positive production externalities from the human capital (skills-experience) may allow permanent growth.

· Savings and capital accumulation are still central.

Schumpeterian Growth

Cross-country studies- King and Levine (1993)

Cross-country studies - Cih ́ak et al. et al (2012)

Growth and Financial Markets (Levine and Zervos 1998)

Time series: Demetriades &Hussein 1996

Dynamic Panel Data (Beck, Levine and Loayza 2000)