Financial deepening and economic growth

Bhattarai, Keshab

Abstract

The core of Shapley-Shubik games and general equilibrium models with a Venn diagram is applied for a theory on the role of real finance in economic growth among advanced economies. Then the dynamic computable general equilibrium (DCGE) models for Germany, France, UK, Japan and USA are constructed to assess the validity of the over financing hypothesis that reappeared after the financial crisis of 2008. Actual financial deepening ratios observed in the non-consolidated balance sheet of the OECD exceeded by factors of 3.5, 2.4, 5.1, 11.6 and 4.8 to the optimal financial deepening ratios implied by DCGE models respectively in these countries because of excessive leveraging and bubbles up to 19 times of GDP which were responsible for this great recession. Containing such massive fluctuations for macroeconomic stability and growth in these economies is not possible in conventional fiscal and monetary policy models and requires a DCGE analysis like this along with adoption of separating equilibria strategy in line of Miller-Stiglitz-Roth mechanisms to avoid asymmetric information problems in process of financial intermediation so that the gap between actual and optimal ratios of financial deepening remain as small as possible.

Citation

Bhattarai, K. (2015). Financial deepening and economic growth. Applied economics, 47(11), 1133-1150. https://doi.org/10.1080/00036846.2014.993130

• Acceptance Date: Jan 1, 2014
• Online Publication Date: Dec 20, 2014
• Publication Date: Mar 3, 2015
• Deposit Date: May 5, 2015
• Publicly Available Date: May 5, 2015
• Journal: Applied economics
• Print ISSN: 0003-6846
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• Volume: 47
• Issue: 11
• Pages: 1133-1150
• DOI: https://doi.org/10.1080/00036846.2014.993130
• Keywords: Financial deepening; Growth
• Public URL: https://hull-repository.worktribe.com/output/373364
• Publisher URL: http://www.tandfonline.com/doi/full/10.1080/00036846.2014.993130
• Additional Information: This is an Accepted Manuscript of an article published by Taylor & Francis in Applied economics on 20 December 2014, available online: http://wwww.tandfonline.com/10.1080/00036846.2014.993130
• Contract Date: May 5, 2015