On This PageJanuary 2002, No. 173

The Role of Financial Services in Economic Growth
Last Updated: 12/13/01

Academics and policymakers have shown an increasing interest in the role that a well-developed financial sector might play in defining a path of economic development characterized by sustainable, long-run economic growth. Theoretical modeling has suggested the importance to growth of a highly developed banking industry and capital markets. Extensive empirical evidence has corroborated this hypothesis. The research focus is now directed toward a deeper understanding of the mechanics of the relationship between financial development and economic growth. In other words, which characteristics of the financial industry seem to have an impact on capital accumulation? What is the role of the regulatory environment in which banks and capital markets operate? How does the quality of law enforcement, reflected in protection of creditors and property rights, affect the role played by banks and capital markets? How does the level of efficiency of these segments of the financial sector affect firms’ access to investment funds and, therefore, capital accumulation? Finally, does it matter if banks are privately owned or government owned?