Daily transactions in the financial markets-both the money (short term, a year or less) and capital (over a year) markets-are huge. financial system is generally considered to be the most well developed in the world. Large financial markets with lots of trading activity provide more liquidity for market participants than thinner markets with few available securities and participants and thus limited trading opportunities. As noted by Demirgüç-Kunt and Levine, together financial markets and financial institutions contribute to economic growth the relative mix of the two does not appear to be an important factor in growth. What are financial markets and institutions?įinancial markets (such as those that trade stocks or bonds), instruments (from bank CDs to futures and derivatives), and institutions (from banks to insurance companies to mutual funds and pension funds) provide opportunities for investors to specialize in particular markets or services, diversify risks, or both. The combination of well-developed financial markets and institutions, as well as a diverse array of financial products and instruments, suits the needs of borrowers and lenders and therefore the overall economy. In particular, researchers have provided additional findings on the finance-growth nexus and have offered a much bolder appraisal of the causal relationship firm-level, industry-level, and cross-country studies all suggest that the level of financial development exerts a large, positive impact on economic growth.įinancial markets help to efficiently direct the flow of savings and investment in the economy in ways that facilitate the accumulation of capital and the production of goods and services. For example, in Chapter 1 of their 2001 book, Financial Structure and Economic Growth, editors Demirgüç-Kunt and Levine concluded:
There is a strong positive relationship between financial market development and economic growth. The simple response is that well-developed, smoothly operating financial markets play an important role in contributing to the health and efficiency of an economy.
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