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Laurent Augier and Wahyoe Soedarmono
''Threshold Effect and Financial Intermediation in Economic Development''
( 2011, Vol. 31 No.1 )
This paper reformulates the finance-growth nexus in the case of developing countries. Using the Neoclassical growth framework, our contribution is threefold. First, we show that entrepreneurship is a growth-enhancing factor in both financial intermediary equilibrium and financial market equilibrium. Second, we show that agent's saving is one of the determinants of the optimal proportion of long-term investment and hence, we characterize the role of bank as financial intermediary. Third, our model is characterized by the existence of multiple steady states equilibrium with threshold effect that impedes the economy to reach a long-run higher steady state equilibrium. Furthermore, we show that financial intermediary is better than financial market, in order to reduce threshold effect and to ensure the long-run steady state equilibrium of capital stock.
Keywords: Threshold Effect, Financial Intermediary, Economic Growth, Developing Countries
JEL: O1 - Economic Development: General
Manuscript Received : Oct 11 2010 Manuscript Accepted : Jan 17 2011

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