Financial deepening and economic growth in advanced and emerging economies

Bhattarai, Keshab

Abstract

While over-…financing caused crises and slow growth in advanced economies including Germany, France and the UK after 2008, more prudent …financial deepening sustained higher economic growth in China and India - two major emerging economies in the world. The actual fi…nancial deepening ratios (AFDR) observed in the non-consolidated balance-sheet from the OECD exceeded by factors of 3.5, 2.4 and 5.1 to the optimal …financial deepening ratios (OFDR) obtained from the solutions of dynamic general equilibrium (DGE) models of those three advanced economies. The corresponding factors were 2.3 and 0.49 for China and India respectively. Labour intensive production technology and a low OFDR relative to a high AFDR in China allowed it to grow at 10 percent during the period of recent global fi…nancial crisis. With a reasonable OFDR and low AFDR India also managed to grow at 6.5 percent. Thus huge gaps between the optimal and actual fi…nancial deepening ratios led to massive macroeconomic consequences as observed after the crises in 2008. Smooth, sustainable and efficient economic growth requires adoption of strategies for separating equilibria in line of Miller-Stiglitz-Roth mechanisms avoiding problems of asymmetric information in the process of …financial intermediation with as narrower gaps as possible between the AFDRs and OFDRs.

Citation

Bhattarai, K. (2015). Financial deepening and economic growth in advanced and emerging economies. Review of development economics, 19(1), 178-195. https://doi.org/10.1111/rode.12133

• Journal Article Type: Article
• Online Publication Date: Jan 27, 2015
• Publication Date: 2015-02
• Deposit Date: May 6, 2015
• Publicly Available Date: May 6, 2015
• Journal: Review of development economics
• Print ISSN: 1363-6669
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 19
• Issue: 1
• Pages: 178-195
• DOI: https://doi.org/10.1111/rode.12133
• Keywords: Geography, Planning and Development; Development
• Public URL: https://hull-repository.worktribe.com/output/373479
• Publisher URL: http://onlinelibrary.wiley.com/doi/10.1111/rode.12133/full
• Additional Information: Authors' accepted manuscript of article published in: Review of development economics, 2015, v.19, issue 1.
• Contract Date: May 6, 2015