FINANCIAL INTERMEDIATION AND ENDOGENOUS GROWTH

This paper examines the relationship between financial development and the factors that determine the long run rate of economic growth. Endogenous growth is modeled through a learning-by-doing effect arising in the real sector. The financial sector is modeled in a monopolistic competition framework. Financial intermediaries improve the allocation of savings to investment and this may increase the long run rate of economic growth. In turn, the size and efficiency of the financial sector is endogenously determined by the model and depend in particular on the volume of savings generated by the real sector. The model exhibits multiple equilibria of endogenous growth, associated with different levels of financial development.