Financial intermediation, economic growth, and international trad

This dissertation contains four chapters that examine the relationship between financial intermediation, economic growth, and international trade. Chapter 1 provides a detailed literature survey on these three fields.;Chapter 2 presents a theoretical model that examines the effect of financial development on economic growth. Financial intermediaries are represented by banks, and financial development is described as the process in which the households invest more of their savings with the banks. As a result of financial development, the overall performance of the economy improves in terms of the aggregate levels. However, the growth rate of this model keeps falling as the economy becomes more financially developed (although no causality is maintained).;Chapter 3 reconciles the theoretical findings of the previous chapter with some empirical studies associating financial development to higher economic growth. The key is to take into consideration financial repression. An extended model that incorporates financial repression shows how it is possible for the Barro (1991) type growth regression on financial development can be consistent with the theoretical conclusions of the basic model of chapter 2. The correct econometric procedure would be to control for financial repression by including both the financial development and financial repression indicators on the RHS of the growth regression. If this is done, the extended model predicts a negative correlation between financial development and economic growth. The empirical work in the last section of this chapter provides support for this claim.;Chapter 4 provides another extension of the basic model to include international trade. It formulates a transmission mechanism in which finance along with international trade could be another explanation to the East Asian "growth miracles". As a result of progressive financial development and less financial repression, the capital stock in these economies naturally builds up, leading to an ever greater capital content in their exports and higher growth rates. This chapter aims to bring attention to this overlooked but important nexus between finance, growth, and trade.