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Financial development and economic growth in a microfounded small open economy model

Zhang, Bo and Zhou, Peng ORCID: 2021. Financial development and economic growth in a microfounded small open economy model. North American Journal of Economics and Finance 58 , 101544. 10.1016/j.najef.2021.101544

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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.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Publisher: Elsevier
ISSN: 1062-9408
Date of First Compliant Deposit: 1 September 2021
Date of Acceptance: 20 August 2021
Last Modified: 12 Nov 2023 21:01

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