Question

. Financial Markets and Institutions: Does the existence of a financial system promote economic growth or subdue it? Both? Neither? Consider the articles by Levine; Beck; Mayer, et al.; and Baraja et al in Finance & Development, March 2017. Be sure to include an explanation of Fisher Separation Theorem in your answer. (15 points)

Answer 1

Does the existence of a financial system promote economic growth or subdue it?

To answer this question we first need to know the role of financial system in economic growth, Financial system plays very crucial role in developing economic growth because it helps the firms to accumulates capital from the peoples who are having surplus of these. it also provides prospects for growth in the investments and also act as a intermedairy between both lenders and borrowers of these funds.

The overall impact of financial system is to ensure sustainable growth, it hepls an efficient allocation of funds and also helps in increasing production.

Many countries have also reported that threre is a negative impact of growth of financial systems on the economic growth which is due to the either financial crisis during that period, low development of financial sectors and below the threshold point and lacking of conducive environment for favourable investment. These are the main factors of negative impact on economic growth.

Explanation of Fisher Separation Theorem: This theorem states that in an efficient capital markets the firms choice of investment is separate from its owner's investment preference so the firm should only be interested in generating profits.

Separation theorem has given important insight and has given a foundation to the MM model, which states that at a given efficient capital markets a firms value shuld not be affected by the way it finances its investments or distributes its dividends.

So, if we see explanation to both the parts we are at a conclusion that the Development of Financial Systems are of greater importance as it helps in economic growth of the country though it is also having some negative impact as suggested by some conutries which was due to the above stated reason.