Financial development and growth: Essays on intermediation

If insufficient saving can be solved by capital flows and lack of human capital addressed by education, why aren't more developing countries converging to the income levels of the developed countries? In this dissertation I argue that poor financial development restricts exchange, creating a serious impediment to growth.; In the first essay I demonstrate that financial deepening improves the mobilization of private saving for countries without mature financial systems. Government saving will be promoted if financial development imposes a deficit financing constraint by lowering seignorage or by raising the cost of domestic borrowing.; Saving mobilization is only part of the story. Financial deepening enhances the efficiency of capital and raises capacity utilization. In the second essay, identifying these different sources of influence as 'quantity' and 'quality', I use an endogenous growth model to solve for balanced growth in transition to financial maturity. For a panel of twenty developing countries the contribution of financial depth to growth through quality effects far outweighs the, still significant, quantity effects. Capital accumulation alone is not the solution to slow growth. As I find that human capital accumulation and saving tend to be substitutes in developing countries, human capital alone doesn't resolve the question. Financial development supplies the missing piece of the puzzle.; In the third essay I explain why the rate of financial development varies between developing countries. There are two answers, transaction costs and government policy. A high degree of social cohesion, higher median net worth, and large economies of scale lower transaction costs, promoting financial development in response to demand. I extend the Solow growth model to include financial factors solving for the steady state levels of financial depth and income, and for the rate of financial development. While a small decline in the parameters determining financial response can lead to a large discrete decrease in the rate of transition to steady state, I did not find evidence of such breaks in the ten developing countries studied. I found that repressive financial policy has a severe dilatory impact on the rate of financial development, and consequently on growth.; I conclude with a series of policy suggestions and a survey of measures of financial depth and financial repression.