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Threshold Effect and Financial Intermediation in Economic Development

Soedarmono, Wahyoe and Augier, Laurent (2009): Threshold Effect and Financial Intermediation in Economic Development.

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Abstract

This paper analyzes the importance of financial intermediation on economic growth. Using the Neoclassical growth framework, we raise a new issue where our model has multiple stationary states with threshold effect. We further confirm that financial intermediation is better than self-financing system in order to ensure the existence and uniqueness of long-run steady state equilibrium of capital stock, as well as to decrease threshold level. The presence of threshold effect is an important finding in studying the finance-growth nexus, since it prevents the economy to raise sufficient initial capital.

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