Threshold Effect, Financial Intermediation and Macroeconomic Performance

This paper analyzes the theoretical finance-growth nexus in the case of developing countries. Using the Neoclassical growth framework, our contribution is threefold. First, we show that entrepreneurship is a growth-enhancing factor in both financial intermediary equilibrium and financial market equilibrium. Second, we show that agent's saving is a main determinant of the optimal proportion of long-term investment and hence, we characterize the traditional role of bank as financial intermediary (deposits and investments). Third, our model is characterized by the existence of multiple steady states equilibrium with the threshold effect of capital stock, as development trap problem, which impedes the economy to reach the higher long-run steady state equilibrium. We show that financial intermediary is better than financial market in order to reduce threshold effect, and to ensure the existence and uniqueness of a higher long-run steady state equilibrium of capital stock by promoting long-term investment