Essays on financial development: Growth, banking crises and nominal volatility

My dissertation studies the development of the banking system and banking crises on economic growth, and the effects of inflation volatility on the size of financial markets; The first chapter presents empirical support for the existence of wealth effects in the contribution of financial intermediation to economic growth, and offers a theoretical explanation. In poor income countries this contribution is consistently lower and, for very low levels of income, it can even be negative. This contribution is increasing in the level of income per capita up to a certain level of wealth. The theoretical explanation is based on the liquidity functions of financial intermediaries. At low levels of income there is a trade-off between the provision of liquidity insurance and growth. However, once the economy has crossed certain wealth threshold, the liquidity role of banks becomes unambiguously growth enhancing. At high levels of wealth this positive effect decreases as the economy approaches the optimal level of consumption risk sharing; The second chapter offers an explanation to the observed recurrence and depth of financial crises and the level of economic development. Middle income economies have larger advantages in developing their financial systems, even at the cost of exposing their economies to banking crises. Low income and high income economies have more incentives to develop a safer banking system. Thus, middle income economies may experience banking crises in their development and, as they get richer, eventually converge to a financially safe steady state. The model also replicates the observed larger cost of banking crises for middle income countries.; The third chapter explores the effects of nominal volatility and limited participation in asset markets on the risk sharing possibilities available to agents. Limited participation and nominal volatility can generate an inefficiently small number of financial assets. A monetary rule, such as a fixed exchange rate or monetary union, that reduces nominal volatility can foster the development of stock markets by increasing the number of equity securities. However, the welfare benefits and costs of a monetary union are asymmetrically distributed both across groups with different access to financial markets and across countries.