Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/250345 
Year of Publication: 
2021
Series/Report no.: 
Cardiff Economics Working Papers No. E2021/21
Publisher: 
Cardiff University, Cardiff Business School, Cardiff
Abstract: 
The global financial crisis since 2008 revived the debate on whether or not and to what extent financial development contributes to economic growth. This paper reviews different theoretical schools of thought and empirical findings on this nexus, building on which we aim to develop a unified, microfounded model in a small open economy setting to accommodate various theoretical possibilities and empirical observations. The model is then calibrated to match some well-documented stylized facts. Numerical simulations show that, in the long run, the welfaremaximizing level of financial development is lower than the growth-maximizing level. In the short run, the price channel (through world interest rate) dominates the quantity-channel (through financial productivity), suggesting a vital role of international cooperation in tackling systemic risk of the global financial system.
Subjects: 
economic growth
financial development
open economy
DSGE
Document Type: 
Working Paper

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