Financial Development And Economic Growth

Although recent financial crises such as Southeast Asian financial crisis in the late 1990s have revealed us the unfortunate tragedy that a fragile and unstable financial system may bring to the whole economy, it has also be generally acknowledged that a well-developed and functional financial system, which can effectively provides financial services to firms, plays a key role in economic development. As a proof of that, how to develop a multi-functional and mature financial system has been the key issue for China's future financial reform and economic development strategy. This dissertation aims at making both theoretical and empirical investigation on the mechanism how financial development affects long-run economic growth, especially the functional role in resources allocation. Both macro-level data and micro firm-level data have been used to examine the link between financial development and real decisions of firms, and the role of financial system has also been studied in an extended open-economy environment, to investigate the effect of financial development on both technology absorptive capability and comparative advantage in international trade.By extending the endogenous growth model with horizontal innovations to construct a five-sector growth model in which a financial sector is introduced, this dissertation sheds light on the mechanism through which financial development may affects economic growth. Two fundamental functions are considered: mobilize savings and finance technology innovation. In this set-up, the optimal solution in the balanced growth path shows that steady-state consumption and output growth rate essentially depends on financial development. The further comparative analysis demonstrates that the finance-growth effect also derive from the productivity in R&D sector as well as human capita] sector, which strongly confirms integrated policies for both financialsector and real sector.Due to theoretical consideration, macro- and micro- level empirical evidenceassessing finance-growth effect are addressed. As for the characteristics of bank-based financial system in China, using time-series data during 1978-2003, this dissertation emphasize on saving-investment ratio to describe macro efficiency of financial system. Empirical results of co-integration analysis suggests that there exists a long positive relationship among private savings, public savings and investments, while the low transformation of private savings to investments restricts capital formation;...