Financial Development, Growth, and the Distribution of Income

Abstract

A paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined. Financial intermediation promotes growth because it allows a higher rate of return to be earned on capital, and growth in turn provides the means to implement costly financial structures. Thus financial intermediation and economic growth are inextricably linked in accord with the Goldsmith-McKinnon-Shaw view on economic development. The model also generates a development cycle reminiscent of the Kuznets hypothesis. In particular, in the transition from a primitive slow-growing economy to a developed fastgrowing one, a nation passes through a stage in which the distribution of wealth across the rich and poor widens. JOURNAL OF POLITICAL ECONOMY io8o JOURNAL OF POLITICAL ECONOMY stochastic structure of the economic environment will be delimited in the following way. ASSUMPTION A. The aggregate shock Ot is governed by the timeinvariant distribution function F(O,). Let 0 = [0, 0] C R + ? and F: 0 -e [0, 1]. Furthermore, suppose that E[ln[+O + (1 -+8]] = f {ln[(lO + (1 -4) 8]}dF(O) > In 8 > -In f for all + E [0, 1]; by Jensen's inequality, this implies E[O] > 8 > 1/13. ASSUMPTION B. For each individual j E [0, 1], the idiosyncratic shocks Et(J) are drawn from the distribution function G(Et(j)

Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment

“…In column (4) we examine the relationship between the extent of public food distribution in a state and its initial financial development. 30 The use of this program as a major poverty alleviation policy increased in the 1970s, with its incidence showing substantial variation across states (Besley and Burgess, 2002). However, again, we see no evidence of trend breaks.…”

“…29 Dasgupta, Dhillon and Dutta [2001] show that state governments who were politically aligned with central government received greater transfers between 1968 and 1997. 30 The Indian public food distribution system seeks to enhance the real incomes of poor households, and protect them against food shocks.…”

“…Access to finance has been seen as a critical factor in enabling people to transform their production and employment activities and to exit poverty (Banerjee and Newman 1993; Aghion and Bolton 1997; Banerjee, 2001). Countries with better developed financial systems, it is argued, should be better able to exploit growth opportunities (Schumpeter, 1934;Gerschenkron 1962; Greenwood and Jovanovic, 1990; Bencivenga and Smith, 1991). Financial development may also enhance financial stability with positive implications for economic performance (Bernanke and Gertler, 1990).…”

Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries

“…This results in a more efficient allocation of resources, a more rapid accumulation of physical and human capital, and faster technological progress. For instance, the theoretical work of Greenwood and Jovanovic (1990) shows that financial intermediaries promote investment and growth by enabling a higher rate of return to be earned on capital, while the growth itself spurs the expansion of financial institutions, implying a two-way relationship between financial intermediation and economic growth. Likewise, in Bencivenga and Smith (1991), financial intermediaries allow agents to channel savings into investments with high return which boosts growth, but here the intermediaries also allow individuals to hold diversified portfolios to mitigate risks associated with their liquidity needs.…”

“…Finally, some economists, like Lucas (1988), discount altogether the possibility that the financial sector has any impact on growth. The importance of financial deepening in channeling savings to the most productive investments and shaping the growth process has received renewed attention as the endogenous growth literature evolved from the 1980s onwards (see Greenwood and Jovanovic, 1990;Bencivenga and Smith, 1991;King and Levine, 1993a;etc.). The strength of the finance-growth relationship can perhaps be regarded as ultimately an empirical matter (King and Levine, 1993b;Levine, 2005), and much of the subsequent literature has focused attention on the empirical aspects of this relationship by considering various data-sets, country groupings, time periods, etc., and different indicators of financial development, and using a whole host of econometric techniques.…”