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Financial deepening and economic growth

Bhattarai, Keshab



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.


Bhattarai, K. (2015). Financial deepening and economic growth. Applied economics, 47(11), 1133-1150.

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
Electronic ISSN 1466-4283
Publisher Routledge
Peer Reviewed Peer Reviewed
Volume 47
Issue 11
Pages 1133-1150
Keywords Financial deepening; Growth
Public URL
Publisher URL
Additional Information This is an Accepted Manuscript of an article published by Taylor & Francis in Applied economics on 20 December 2014, available online:


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