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Threshold Effect and Financial Intermediation in Economic Development

Author

Listed:
  • Laurent Augier

    (FLASH - Faculté de Lettres, Langues, Arts et Sciences humaines - ULR - La Rochelle Université)

  • Wahyoe Soedarmono

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

Abstract

This paper reformulates the finance-growth nexus in the case of developing countries. Using the Neoclassical growth framework, our contribution is threefold. First, we show that entrepreneurship is a growth-enhancing factor in both financial intermediary equilibrium and financial market equilibrium. Second, we show that agent's saving is one of the determinants of the optimal proportion of long-term investment and hence, we characterize the role of bank as financial intermediary. Third, our model is characterized by the existence of multiple steady states equilibrium with threshold effect that impedes the economy to reach a long-run higher steady state equilibrium. Furthermore, we show that financial intermediary is better than financial market, in order to reduce threshold effect and to ensure the long-run steady state equilibrium of capital stock.

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  • Laurent Augier & Wahyoe Soedarmono, 2011. "Threshold Effect and Financial Intermediation in Economic Development," Post-Print hal-00785204, HAL.
    • Handle: RePEc:hal:journl:hal-00785204
    Note: View the original document on HAL open archive server: https://unilim.hal.science/hal-00785204
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    References listed on IDEAS

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    Cited by:

    1. Soedarmono, Wahyoe & Tarazi, Amine, 2013. "Bank opacity, intermediation cost and globalization: Evidence from a sample of publicly traded banks in Asia," Journal of Asian Economics, Elsevier, vol. 29(C), pages 91-100.
    2. Jean-pierre Allegret & Sana Azzabi, 2013. "Financial development, threshold effects and convergence in developing and emerging countries," Economics Bulletin, AccessEcon, vol. 33(3), pages 1899-1921.
    3. Stolbov, Mikhail, 2013. "The finance-growth nexus revisited: From origins to a modern theoretical landscape," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 7, pages 1-22.
    4. Soedarmono, Wahyoe & Trinugroho, Irwan & Sergi, Bruno S., 2019. "Thresholds in the nexus between financial deepening and firm performance: Evidence from Indonesia," Global Finance Journal, Elsevier, vol. 40(C), pages 1-12.

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    More about this item

    Keywords

    Threshold Effect; Financial Intermediary; Economic Growth; Developing Countries;
    All these keywords.

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • G0 - Financial Economics - - General

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