Well-functioning financial markets can have a positive effect
on economic growth by facilitating savings and more efficient allocation
of capital. This paper characterises some of the recent theoretical
developments that analyse the relationship between financial
intermediation and economic growth and presents empirical estimates
based on a model of the linkage between financially intermediated
investment and growth for two separate groups of countries, developing
and advanced. Empirical estimates for both groups suggest that financial
intermediation through the efficiency of investment leads to a higher
rate of growth per capita. The relevant coefficient estimates show a
higher level of significance for the developing countries. This
financial liberalisation in the form of deregulation and establishment
and development of stock markets can be expected to lead to enhanced
economic growth.