Finance, growth, and public policy

Abstract

Development economists have long argued that modern financial markets are important to growth and that financial repression is a serious obstacle to progress in many developing countries. The authors consider the relationship between finance and growth and the appropriate role of government policy. Many economists have stressed how problems of asymmetric information and contract enforcement impede the functioning of financial markets in developing countries. In addition, they try to elaborate on these theories to make them relevant to policymakers. Information gaps and enforcement frictions introduce a premium in the cost of external funds. Factors such as the borrower's financial health, the efficiency of financial intermediation, and the ease of enforcing private financial contracts govern the size of this premium. How financial factors contribute to development may be understood along these lines. Financial contracts and institutions should be designed to minimize this premium.Banks&Banking Reform,Financial Intermediation,Environmental Economics&Policies,Economic Theory&Research,Health Economics&Finance