Page 70 - BFSI CHRONICLE 10 th Issue (2nd Annual Issue ) 23062 COPY.indd

BFSI Chronicle, 2 Annual Issue, 10 Edition July 2022
th
nd
financial sector could affect costs. recent years economists namely, Ross Levine,
Robert King and others are making an effort
Patrick (1966) suggested that the relationship to re-examine the role played by the financial
between economic growth and financial markets in strengthening the economic growth.
development can be bilateral. Patrick (1966)
called this bilateral relationship the demand- On the theoretical side complex models have
traced and supply-led hypotheses. According been established to exemplify the many
to the demand-tracking hypothesis, there is a channels through which the development of
relationship from economic growth to financial financial markets are affected by economic
development. This situation can be seen mostly growth. These networks provides with the
in the economies of countries with little or no enablement of the trade hedging, pooling
financial market development. In the supply- of risk, and diversification; the monitoring
led hypothesis, it is argued that financial of managers and exerting corporate control;
development will encourage economic growth. facilitation of the exchange of goods and
This situation is more common in countries services; and the efficient allocation of
with well-developed financial sector. It is resources.
possible to come across bilateral relations in
On the empirical side, a number of studies at
countries with medium financial sector
the firm-level, industry-level, country-level and
One of the most discussed topic among cross-country comparisons have confirmed the
economists is role of financial system in presence of a strong link between the financial
economic development, whereby every sector and economic growth. Researches done
economist tend to hold a dramatically distinct by King and Levine’s has shown that level of
opinion on the same. Bagehot (1873) and financial depth/defined as the ratio of liquid
Schumpeter (1911) have reasoned that efficient assets to GDP does in fact help to predict the
financial system helps the economy of a nation pattern and nature of economic growth. Other
to grow greatly. Indeed, Ross Levine has work by Levine has revealed that financial
pointed on how Schumpeter held a convention intermediary development does positively
that often well-functioning banks stimulate influence economic growth, it even stands true
technological innovation in an economy by when other factors that might influence the
offering funding to various entrepreneurs, economic growth are kept constant.
who hold a position to successfully implement
innovative products and processes. However, Role of Financial Markets in Economic
it should be noted that more recent economists development
What is the association between the
are often sceptical about the role played by the
financial sector in the economic growth. development of markets and economic
development? It is quite interesting to note
In 1952 Joan Robinson put forth the fact that that that markets-especially financial markets
economic growth creates demand for financial – play a central role in economic development
institutions. In 1988, Robert Lucas has sacked and similarly, economic development leads to
the finance-economic growth relationship the establishment of new markets.
asserting that economists ‘badly over-stress’
over the role that financial factors play towards Financial markets are the utmost means of
channelling investment capital to its highest
the economic growth. Yet, we find that in

The Institute Of Cost Accountants Of India

70