| The starting question of this dissertation is as follows: Why does someone deposit money in a bank while another borrows and starts an investment project? We find an answer to this question in the heterogeneity of agents. Agents are heterogeneous in creating capital goods. More capable agents wish to borrow from a bank and create capital goods as long as the interest rate is less than their marginal products. Less capable agents prefer to make a deposit in a bank rather than to borrow when their marginal products are less than the interest rate. We obtain a dynamical system for the cut-off point of agents productivity, which divides agents into savers and investors, and is very important in this dissertation. In chapter 1, deriving a condition for the existence of asset bubbles, we demonstrate that (i) a monetary steady state is constrained dynamically inefficient, whereas capital in the steady state is underaccumulating relative to the quasi-golden rule, (ii) there exists a government intervention which corrects the constrained dynamic inefficiency, and (iii) for some parameter values, such a government intervention reduces the utilities of agents with high productivity, while it increases per capita consumption. Chapter 2 examines the effect of financial development on volatility in economic growth. In early stages of the development of a financial sector, growth rates evolve monotonically. At the intermediate level of financial development, as the degree of credit market imperfections diminishes and as asymmetric information between borrowers and lenders is less pronounced, an economy exhibits endogenous growth cycles. However, as the financial sector matures, the volatility in the growth process dissipates and the growth rates evolve once again monotonically. Evidence from panel data supports these findings. Chapter 3 demonstrates that the difference in the levels of financial development between countries determines the direction of capital movement, and that for some parameter values, countries with a poorly developed financial sector are never industrialized, if financial markets are integrated, while if they remain closed economies, they will experience steady endogenous growth. This result gives a theoretical foundation for the capital flow regulations imposed by developing countries. |
