Literature Review of the relationship between Finance and Economic Growth

Abstract

Uncertainty about the nature of the relationship between financial development and economic growth remains. Despite the large number of studies carried out, the results continue to generate debate. Some researchers argue that financial development stimulates growth by facilitating access to credit, resource allocation and innovation. However, others point out that this relationship can be nuanced, as a poorly regulated financial sector or one that is expanding too rapidly can lead to instability, financial crises and inequality, thereby slowing down growth in the long term.

The aim of this study is to analyse theoretically the relationship between finance, with its various components ‘capital market’, ‘financial intermediary’ and economic growth, based on an extensive and varied literature review covering different periods and regions. It aims first to understand the overall impact of the development of the financial system on economic growth, and then to examine more specifically the influence of each structure on the latter. The results of our study highlight the positive impact of finance on economic growth, while identifying an optimal threshold beyond which this impact becomes negative. Below this threshold, finance promotes investment and improves economic efficiency. However, when the financial sector becomes disproportionately large in relation to the real economy, it can compromise stability, limiting the benefits for long-term growth.

Keywords: Economic growth, financial intermediary, capital market, impact

JEL Classification: E44

Paper type: Theoretical Research