Role Of Financial Intermediation On Economic Growth

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The role of financial intermediation in economic growth has got wider discussion as entrepreneurship, operations of which is majorly dependent on external financing, proved to be an effective driver of economic development. A whole century has past since the first theory of finance-entrepreneurship-growth nexus was proposed, but economists still did not achieve consensus neither regarding its existence nor its causality direction. Over time financial markets emerges to the extent that may negatively affect on growth, as well as diverse sources of financing appeared to be effective. The idea of existence of correlation between financial development and economic growth was developed at the beginning of the last century (Schumpeter, 1912). It implies that well developed financial sector is able to enhance productivity and drive economy through making rational investment decisions and funding entrepreneurial innovative activities. During the second half of the 20th century economists were engaged in disputes about contribution of financial system development to growth in income per capita. One front of scholars followed theory of minor effect of financial system on growth (Robinson, 1952; Solow, 1956, 1957), while the other sees the development of the financial intermediation as the clue to prosperity (Gurley and Shaw, 1955; Goldsmith, 1969; McKinnon, 1973). Nobel Laureate Merton Miller (1998) has even refused to discuss such an obvious nexus. Gurley and Shaw (1955) findings

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