On the real effects of financial development

TitleOn the real effects of financial development
Publication TypeWorking Paper
Year of Publication2000
AuthorsDeidda, LG

We study a simple mode of financial and economic development based on consumption of real resources by the financial sector and constant returns to scale in accumulation of physical capital in the production secto. Transition from financial intermediation and firm-production is associated with a process of reallocation of resources towards more productive investiments and financial services. We find that the immediate growth impact of financial development is ambiguous: transition might lead to a periode of output decline. Redistibution policies which do not alter the timing of the transition imposed by the market forces could be not enough to offset the possible negative-growth effects associated with the transition process, and to prevent 'povertry traps' possibly associated with premature emergence of financial intermediation.

Citation Key154
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