Finance, Credit and Markets

The role of the financial system is to intermediate between lenders and borrowers and provide avenues for saving and help investors find their financing needs. The financial markets impact growth by channeling saving to firms and improving the allocation of capital. Moreover, efficient financial markets and institutions tend to lower search and transactions costs in the economy.

2. As the industrialized nations' economies grew in the eighteenth, nineteenth and twentieth centuries, their financial systems also grew in depth and breadth. In the 19th century, London achieved its status as the world's leading financial centre, because the financial sector had developed rapidly in order to serve the needs of British industry and British exporters. Similar is the case with 20th century New York which played a similar role in relation to the American economy.

3. The relationship between financial development and economic growth is a subject of debate. Some economists just do not believe that the finance-growth relationship is important. For instance, Robert Lucas asserted in 1988 that economists badly over-stress the role of financial factors in economic growth. Moreover, Joan Robinson declared in 1952 that "where enterprise leads, finance follows". According to this view, economic development creates demands for particular types of financial arrangements, and the financial system responds automatically to these demands. ...