Financial Development and Economic Growth: A Theoretical and Empirical Overview

Abstract

The present survey aims to summarize the most relevant findings of the theoretical models on finance and growth and to relate them to the empirical evidence. Since it is too ambitious to provide a complete understanding of the existing debate, this survey describes the most relevant contributions. More specifically, it focuses on the theoretical contributions that analyze the role of competitive financial intermediaries and stock markets in (i) providing risk diversification, (ii) reducing liquidity risk and (iii) mitigating both ex-ante and ex-post asymmetric information between the borrower and the lender. From an empirical point of view, the classification adopted in reviewing the literature emphasizes the innovative aspects without ignoring the fact that the same contribution can be relevant also for different concerns. Both theoretical and empirical evidence find a positive and strong link between financial development and economic growth, thereby suggesting that policy makers should take into account the role of the financial system to sustain growth.

Keywords: financial intermediaries, financial markets, economic growth

JEL Classification: G0, O0