Financial System Case Study

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This section highlights some of the principal functions performed by the financial sector of the economy. The financial system in today’s world is one of the most important systems in any functioning economy; this is because of the central role it plays within the economy. The financial system has also become more complex in its functions over time due to the increased volume of activities in the sector as well as the increased interconnectedness of the global economy. In this section we would focus on the functions of the financial system within a particular economy, without regard to the functions of the financial system in an interconnected economy. For the purpose of this study the financial system is used to refer to banks, stock markets and all related financial institutions. Having a comprehensive understanding of the roles the financial system plays within the economy would help shape our understanding of the impact of financial depth on economic growth. On that note I believe that a well-functioning financial system can play an important role in economic growth by performing the following functions …show more content…

In this study liquidity refers to the ease with which agents easily to convert their investments into cash. Levine (1997) identifies those stock markets that are liquid as having the ability to provide certainty to investors about the settlement and timing of trades at a relatively cheap cost. Financial market liquidity impacts on economic growth by providing a means of facilitating the financing of high earning long term projects, while satisfying the short-term commitment requirements of investors. Boyd and Smith (1998) pointed out that the existence of liquid financial markets (stock markets to be specific) enables the employment of more long-term higher productive techniques of production, which allow greater economies of scale and consequently enhance economic

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