Literature Review

Part of the Contributions to Economics book series (CE)


The role of finance in the economic development is not something of a recent discovery and the literature on the importance of the financial system for economic growth is voluminous. Bagehot (1873), Schumpeter (1911), Robinson (1952) and Gurley and Shaw (1955), among others, have written on the subject of the relationship between financial development and economic development. Bagehot (1873) notes that the financial system played a critical role in igniting industrialization in England by mobilizing capital effectively and efficiently. Schumpeter (1911) asserts that there is a positive influence by the development of the financial sector on the level and rate of growth of a country's per capita income. This led to the belief by many development economists that the financial system has considerable importance for economic growth. Specifically, there seems to be a strong belief that lack of a developed financial system impedes economic development, and therefore policy makers should enact policies that encourage and strengthen the existence of a proper financial system. Some have taken a more neutral position and argue that like any other factors that serve as an ingredient for economic development, the development of the financial sector is not a necessary condition but can only fairly be ranked pari passu with other numerous inputs (Newlyn & Avramides, 1977). At the extreme other end, some have argued that the financial system has a minor role to play in the development of the general economy and merely enables the players in the private sector to ‘make’ and ‘lose’ money. This view, which is termed as the ‘casino hypothesis’1 of the financial system would simply mean that policy makers might easily ignore the need for strengthening such an institution.


Interest Rate Financial Market Financial System Financial Institution Financial Development 
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© Springer-Verlag Berlin Heidelberg 2010

Authors and Affiliations

  1. 1.Centre for Strategic Economic Studies CSESVictoria UniversityMelbourneAustralia

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