NBER Working Paper #3189December 1989

FINANCIAL DEVELOPMENT, GROWTH, AND THE DISTRIBUTION OF INCOME

ABSTRACT

A paradigm is presented where both the extent of financial intermediationand the rate of economic growth are endogenously determined. Financialintermediation promotes growth because it allows a higher rate of return to beearned on capital, and growth in turn provides the means to implement costlyfinancial structures. Thus, financial intermediation and economic growth areinextricably linked in accord with the Goldsmith-McKinnon-Shaw view on economicdevelopment. The model also generates a development cycle reminiscent of theKuznets hypothesis. In particular, in the transition from a primitive slow­growing economy to a developed fast-growing one, a nation passes through astage where the distribution of wealth across the rich and poor widens.

Jeremy GreenwoodFederal Reserve Bank of Minneapolisand University of Western OntarioDepartment of EconomicsLondon, Ontario N6A SC2CANADA

Boyan JovanovicNew York UniversityDepartment of Economics269 Mercer St, 7th FloorNew York, New York 10003