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This paper investigates the role of the banking system in the economic transition process. This is considered in the context of an overlapping generation model with endogenous growth. There are two production technologies, one for the production of a final good and the other for the production of an investment good. The return of caital invested in the investment good technology is stochastic. Banks collect the saving of households and finance the production of the investment good while respecting some prudential rules.We show that the capital accumulation is constituted of several phases and that the economic transition process depends on the fragility of the financial system defined as the degree of the credit market perfection and the bank’s inefficiency. Hence, efficient banks enables the economy to resist to bad performances of the investment good sector. However, in case of inefficient banks, the situation can degenerate in a confidence crisis in the banking system delaying the economic transition process by several years. We show that this negative impact is more severe when the economy is less developed.

Item Type: MPRA Paper -

Original Title: Banking Efficiency and the Economic Transition Process-

Language: English-

Keywords: Banking Efficiency, Confidence Crisis, Transition Process-

Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider TradingO - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and GovernanceG - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages-

Autor: Nabi, Mahmoud Sami


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