Causality of Financial Development and Economic Growth

Abstract

Most of the monetarist are giving an increasing amount of attention has to the connection between financial
markets and economic development. The theory of growth and finance establishing aassociationbetween”
finance and growth” as well as the results of a large number of empirical studies suggest that financial markets
can be regarded as an engine of growth. However, the experiential evidence also shows that crisis-like
developments in the financial markets have occurred with increasing frequency in recent years, and that such
phenomena at least temporarily limit the scope for economic development. The paper surveys how economic
theory has dealt, or is dealing, with the dual impact of financial markets on economic development. Four
theories have been selected for consideration - neo-classical and Keynesian theory, the New Development
Finance approach and the new theory of finance which is grounded in the economics of information. Each
emphasises different aspects of the relationship between financial markets and economic development, but so far
it has proved impossible to arrive at a consensus view.