| In the last couple of decades, a growing body of theoretical and empirical literature has developed a paradigm in which informational asymmetries may introduce inefficiencies in financial markets which may have quantitatively significant real effects. Financial intermediaries emerge endogenously to reduce those asymmetries and lower the costs of researching potential investments, exerting corporate control, managing risk, and mobilizing savings.; In the light of this literature, the purpose of this study is to examine the relationship between financial intermediation and economic growth within the framework of an endogenous growth model which explicitly analyzes the financial intermediation industry in an oligopolistic setting. The model emphasizes that even if credit markets are contestable, costly and imperfect information will make them imperfectly competitive. In turn, insufficient competition will reduce the efficiency of financial services offered to the real sector and will also slow the rate of overall economic growth. Conversely, when the aggregate stock of capital in the economy increases, the financial system will become more competitive and intermediaries will become, on average, more efficient.; This theoretical framework generates a relevant empirically testable hypothesis: the growth rate of the economy is inversely correlated with the margin of financial intermediation. To further explore this issue the study examines some time-series cross-section data using two complementary econometric techniques. The first one is a pure cross-sectional estimator, where data for 71 countries are averaged over the period 1970–1998. The second technique employs a panel data. Overall, the effects of the financial intermediation margin on economic growth are quite consistent across both techniques.; This performance is also consistent with the main implications derived from the theoretical model. The development of the financial system in the long-run would lead to a situation where increased competition between financial intermediaries would increase their efficiency and reduce the spread between lending and deposit rates. Hence, there would be not only an increase in the supply of credit to the economy but also a more efficient allocation of the available financial resources, which in turn would translate into a higher growth rate. |
