Financial development and economic growth in a microfounded small open economy model |
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| Affiliation: | 1. School of Economics and Management, Beijing University of Chemical Technology, 15 North Third Ring Road, Beijing 100029, China;2. Cardiff Business School, Cardiff University, D47 Aberconway Building, Colum Drive, Cardiff CF10 3EU, United Kingdom;1. Institute of Business and Management, National Yang Ming Chiao Tung University, 118 Chung-Hsiao West Road, Section 1, Taipei, Taiwan;2. Graduate Institute of Finance, National Taiwan University of Science and Technology, 43, Keelung Rd., Section 4, Taipei, Taiwan;3. Center for General Education, Chung Yuan Christian University, 200 Chung Pei Road, Chung Li District, Taoyuan City, Taiwan;4. Science and Technology Policy Research and Information Center, National Applied Research Laboratories, 106 Heping East Road, Section 2, Taipei, Taiwan;5. Power Generation Division, Taiwan Power Company, 242, Roosevelt Road, Section 3, Taipei, Taiwan;1. School of Business, Shantou University, Shantou, China;2. School of Economics and Statistics, Guangzhou University, Guangzhou, China;1. Graduate Program in Economics, Federal University of Santa Catarina, 88049-970 Florianopolis S.C., Brazil;2. Department of Economics, Federal University of Santa Catarina, 88049-970 Florianopolis S.C., Brazil;3. Department of Statistics, University of Brasilia, 70910-900 Brasilia, D.F., Brazil;4. Graduate Program in Business Administration, University of Brasilia, 70910-900 Brasilia D.F., Brazil;5. Graduate Program in Economics, Federal University of Espirito Santo, 29075-910 Vitoria E.S., Brazil |
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| Abstract: | The global financial crisis since 2008 revived the debate on whether or not and to what extent financial development contributes to economic growth. This paper reviews different theoretical schools of thought and empirical findings on this nexus, building on which we aim to develop a unified, microfounded model in a small open economy setting to accommodate various theoretical possibilities and empirical observations. The model is then calibrated to match some well-documented stylized facts. Numerical simulations show that, in the long run, the welfare-maximizing level of financial develop is lower than the growth-maximizing level. In the short run, the price channel (through world interest rate) dominates the quantity-channel (through financial productivity), suggesting a vital role of international cooperation in tackling systemic risk of the global financial system. |
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| Keywords: | Economic growth Financial development Open economy DSGE |
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