There are two channels by which the development of financial markets affects the increase in output: (a) the reallocation of capital and the improvement in marginal productivity of capital; and (b) the accumulation of capital or the increment in savings. Regarding the first channel, most studies agree that financial markets facilitate more efficient allocation of investment. In the latter, although there is little doubt that augmented savings lead to increased output, there is considerable debate on the effects of financial market development on savings. McKinnon (1973) and Shaw (1973) argue that the elimination of financial repression narrows the wedge between borrowing and lending interest rates and therefore promotes savings. However, from the perspective of risk-sharing, Aiyagari (1994) and Devereux and Smith (1994) demonstrate that the development of financial intermediaries unambiguously reduces precautionary savings. In particular, Jappelli and Pagano (1994) applies a three-period overlapping generations model to prove that binding liquidity constraints on consumer credit can increase the aggregate savings rates, and that among the mainly OECD countries, less-developed mortgage markets are associated with higher savings rates
Notes
Cover title
"March 2001"--Page 1
Bibliography
Includes bibliographical references (pages 22-26)
Notes
English
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