Financial Markets and Economic Development

01-06-1998
Author(s): Panicos Demetriades
Publication Number: ECES-WP27-E

Abstract:

Financial markets can influence economic growth by improving productivity of capital, channeling investment to firms and increasing savings for greater capital accumulation. Because of asymmetric information, however, prudential regulation is necessary to ensure the stability of financial markets, particularly during financial liberalization. At times of liberalization, interest rate controls may be a potentially stabilizing force that should not be viewed only as a form of financial repression. This is particularly true given the potential the negative impact of stock markets — due to the associated volatility and speculation — on economic development.

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