FINANCIAL SYSTEMS AND CAPITAL MARKETS: AN ALTERNATIVE VIEW

Journal of economic literature, 1997

2011

Journal of Financial Services Research, 1990

The core function of the financial system is to facilitate the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment. This system includes the basic payment system through which virtually all transactions clear and the capital markets which include the money, fixed-income, equity, futures, and options markets and financial intermediaries. The capital markets are the medium that makes possible the basic cash-flow cycle of household savings flowing to capital invest ments by firms, followed by a return to households (via profits and interest payments) for consumption and recycling as new savings. Through often-elaborate financial securities and intermediaries, the capital markets provide risk-pooling and risk-sharing opportuni ties for both households and business firms. Well-developed capital markets allow for separation of the responsibility for the capital-flow requirements of investments from the risk-bearing responsibility for those investments. In both an international and domestic context, this facility permits efficient specialization in production activities, according to the principle of comparative advantage. In addition to these manifest functions, the capital market serves an important, perhaps more latent, function as a key source of information that helps coordinate decentralized decision-making in various sectors of the international economy. Interest rates and security prices are used by households or their agents in making their consumption-saving decisions and in choosing the portfolio allo cations of their wealth. These same prices provide critical signals to managers of firms in their selection of investment projects and financings.

Economic Development and Financial Structures, 2004

The aim of this brief work is to examine the relationship between economic development and financial structures, trying to understand if financial systems could have a positive, neutral or negative function for the economic growth. At last, we underline the importance of the new “Basel Capital Accord” for the future safety both of the financial system and the real economy.

2010

In this paper we explore the role of finance in the recent crisis noting that its expansion, in a context of deregulation and globalisation, has boosted financial profits and capital accumulation, but at the cost of a growing systemic instability both in the leading capitalist economy, i.e. the USA, and at the international level. The expansion of finance tends to emerge in certain phases of capitalist development, in particular during periods of countries’ decline. At the same time, each phase has its peculiar aspects and, referring to the recent evolution, we focus on the phenomenon of financialisation, intended as an increasing involvement of economic agents in the working of financial markets.

This paper discusses the emergence of financial structures and the three alternative ways in which the role of the financial structure helps in economic development. The three alternative views are: first, the primitive view by John G. Gurley and E. S. Shaw. Second, the functional approach by Ross Levine. The last one is the historical perspective by Alexander Gerschenkron. The three views are followed by the conclusion.

Theoretical and empirical research has shown that a sound and effective financial system is critical for economic development and growth. The financial system, however, is also subject to boom and bust cycles and fragility, with negative repercussions for the real economy. Further, the political structure of societies, often pre-determined by historic experience, is critical for the structure and development of the financial system. This paper is a critical survey of three related strands of literature -the finance and growth literature, the literature on financial fragility, and the politics and finance literature. literature that has explored the causes and socioeconomic costs of financial fragility, including systemic banking crises. Historic analyses and case studies have given way to more systemic cross-country explorations of idiosyncratic and systemic banking distress and their determinants.

RePEc: Research Papers in Economics, 2008

This survey reviews the literature on the political economy of financial structure, broadly defined to include the size of capital markets and banking systems as well as the distribution of access to external finance across firms. The theoretical literature on the institutional basis for financial development and the recent evidence suggests that unconstrained political power undermines financial accumulation. Even under limited government, unaccountable institutions lead to regulatory capture, favor connected interests, and undermine finance access and entry. Thus the degree of access to political rights by citizens thus strongly affects their access to finance. Finally, we review the recent literature on the time variation of financial development across democracies during the XX century.

What is the relationship between markets and development? It is argued that markets promote growth, and that growth in turn encourages the formation of markets. Two models with endogenous market formation are presented to analyze this issue. The first examines the role that financial markets -banks and stock markets -play in allocating funds to the highest valued use in the economic system. It is shown that intermediation will arise under weak conditions. The second focuses on the role that markets play in supporting specialization in economic activity. The consequences of perfect competition in market formation are highlighted.