Financial intermediation and economic growth in developing countries

Abstract

Presents a model that is suitable for evaluating not only the total effects of financial intermediation on economic growth, but also the channels through which the effects are brought about. These two channels are: the externality of financial on the real sector and the inter‐sectoral differential between financial and real sectors in the productivity of factors of production. Also presented is the conventional and rather ad hoc model for evaluating the effect of financial intermediation on economic growth. All the models were estimated with cross‐sectional data over the 1970s and 1980s for 90 developing countries and the main findings are that: financial intermediation exerts positive effects on economic growth in developing countries; the two postulated channels of the effects of financial intermediation are both relevant in developing countries; and financial depth, defined as the ratio of financial aggregates to GDP, promotes economic growth in only low‐income developing countries while it has no effect in high‐income ones.

Citation

Odedokun, M.O. (1998), "Financial intermediation and economic growth in developing countries", Journal of Economic Studies, Vol. 25 No. 3, pp. 203-224. https://doi.org/10.1108/01443589810215351