Economic Growth and Financial Development

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There are three views about the relation between economic growth and financial development. First, financial development has impact on economic growth (i.e. Bagehot, 1873; Schumpeter, 1912; McKinnon, 1973; Shaw, 1973; Patrick, 1966; Goldsmith, 1969; Fry, 1973). Second, economic growth leads to financial development and that where there is economic growth financial development follows (i.e. Robinson, 1952). The third view, however, contends that both financial development and economic growth Granger cause one another. In the essay, our group focus on the first view which financial development will has passive influence on economic growth. During the year from 1955 to 1993, many scholars has study the relationship between financial development and economic growth. Along with the time goes, the theory that financial development will real promote economic growth has been more and more prefect. In the years between 1950s and 1960s, economists such as Gurley and Shaw began to stress the credit markets and the importance of financial intermediaries, which they believed play an important role in economy. [5] They argued that tradition monetary transmission mechanism ignores the factor of financial structure and financial flow and only pays attention to the total amount of money and the connection of the output. In 1955, Gurley and Shaw bring up the development of financial institution is both a determined and determining variable in the growth process. (Gurley and Shaw, 1995, p. 532). Gurley and Shaw stressed that financial intermediaries exert influence on credit supply rather than money supply. In this way, financial intermediaries improve the efficiency of savings turning into investments and then affect the whole economic activities. They are the earliest scholars to study in-depth the relationship between financial and economic development in developing countries. Gurley and Shaw pointed out that the main access road of monetary policy transmission probably have...
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