Financial development and economic growth

Abstract

To understand how the financial integration achieved by the globalization and technology development affects one nation’s economic growth has been one of the most challenging quests in the area of macroeconomics, over the last decades. The financial market has become greatly important to countries’ growth, it moves trillions of dollars per day and connects all members of one society through most complex and sophisticated financial instruments. Theoretical research in this area is not abundant, since it is not easy to convert the complex interactions between the financial system and the economy into mathematical expressions and models. Given this background, the present dissertation intends to offer a theoretical contribution to research on finance and growth. The present study consists in developing a growth model that considers financial development. We will focus on the R&D-based endogenous growth models and we will build on Thompson’s (2008) model, which considers theoretical aspects developed by Rivera-Batiz and Romer (1991) and Evans et al (1998), creating a new model where we replace internal investment costs with external investment costs, in which we introduce an analytical function for the price of patents, considering the financial development. We additionally introduce financial development in the consumers side of the economy. The theoretical results obtained are tested through a numerical-solution analysis using standard values for our parameters. We show theoretically that financial development positively influences the rate of economic growth.