Growth-Finance Nxus

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Discuss the empirical evidence on growth-finance nexus.

A strong financial system should be able to encourage the allocation of financial resources to a great extent in other to have good productivity and the creation of market efficiency. This indicates that the services of financial intermediaries should be of vital important for the improvement of productivity and economy innovation. Thus the relationship between the economic growth and financial development has been a wide issue of empirical research. This give rise to the question of whether financial development causes economic growth or reverse is the case. The aim of this essay is to explain and discuss the empirical evidence on growth-finance nexus.
Financial sector tend to play a vital role in the economy. The main aim of financial intermediaries is to provide the supply of financial services to industries in an economy; this involves a wide range of organizations that manage money, which includes banks, credit unions, credit card companies, credit union, onshore and offshore, insurance companies, stock brokerages, consumer finance companies, some government sponsored enterprises and investment funds (microfinance institutions) and money lenders. The mobilization of savings and the allocating of credit across a given period of time are done by the finance sector. It does not only provides payment services, but the financial sector also provide more vitally products that helps households and firms to cope with any economic uncertainties by hedging, sharing, pooling and pricing risks. A financial sector that is efficient tend to reduce the risk and cost associated with the production and trading goods and services, which then makes a good contribution in rai...

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...ddresses this problem by using a broad cross-country approach that allows treatment of financial system structure across many countries with different growth rates. The findings of this study support neither the bank-based nor the market-based views; they are, instead, supportive of the financial services view, that better-developed financial system is what matters for economic growth. An earlier study by Demirguc-Kunt and Levine (1996), using data for forty-four industrial and developing countries for the period 1986 to 1993, had concluded that countries with well-developed market-based institutions also have well-developed bank-based institutions; and countries with weak market-based institutions also have weak bank-based institutions. Thereby supporting the view that the distinction between bank-based and market-based financial systems is of no consequence.

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