Financial intermediation and economic growth in less‐developed countries: A theoretical approach

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Abstract
In stressing the importance of financial intermediation in the development of the LDCs, neither the approach of financial deepening nor that of real interest rates has clarified the relationship between financial intermediation and real development. This paper shows—within a two‐sector model, but extendable to the n‐sector case—that high (equilibrium) real interest rates are growth‐promoting, even if total real savings is interest insensitive (a controversial empirical question), because they bring about an improvement in the quality of the capital stock in a well‐defined sense. The analysis also has implications for the theories of inflation and income distribution in the LDCs.

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