Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Importance of Financial Markets

After the global financial crisis, many people started thinking that financial markets are evil. So it is nice to see several papers in quick succession arguing that financial markets are more important than banks.

Asli Demirguc-Kunt, Erik Feyen, and Ross Levine presented a paper at a World Bank conference in June entitled “Optimal Financial Structures and Development: The Evolving Importance of Banks and Markets”. They present strong empirical evidence to show that as countries grow richer and become more sophisticated, they need markets more than banks. The optimal financial structure becomes more market based at higher levels of income. Deviations from this optimal structure lead to slower growth.

This month, Julien Allard and Rodolphe Blavy published an IMF working paper entitled “Market Phoenixes and Banking Ducks: Are Recoveries Faster in Market-Based Economies?” in which they argue that “market-based economies experience significantly and durably stronger rebounds than the bank-based ones” They go on to state that “because the financial structure of economies matters, structural policies to deepen financial markets so that they can effectively complement banking sectors are useful. This suggests that policies that would stifle the development of financial markets after the crisis would be misguided.” Of course, Allard and Blavy also emphasize that policy makers must enhance the stability of financial markets as well as reduce rigidities in the real economy.

Closed related is a paper by Stephen Cecchetti, M S Mohanty and Fabrizio Zampolli presented at the Jackson Hole Symposium late last month entitled “The real effects of debt”. Cechetti et al argue that “At moderate levels, debt improves welfare and can enhance growth. But high levels can be damaging.” For example, when corporate debt goes beyond 90% of GDP, it becomes a drag on growth. This appears to me to suggest that deepening of equity markets is more important than the development of banks beyond a certain stage of development.

Advertisements

6 responses to “Importance of Financial Markets

  1. Pingback: Profitcover.com | Share Market | Bseindia | BSE | NSE India | Live Market Quotes | Online Trading | Stock Exchange | Share Prices | sensex | nifty | Stock Market Quotes

  2. us airways November 6, 2012 at 2:51 pm

    Greate article. Keep writing such kind of info on your
    site. Im really impressed by your blog.
    Hi there, You’ve performed an incredible job. I’ll certainly digg it and in my opinion suggest to my friends.
    I am sure they will be benefited from this website.

  3. merchant cash advance Companies May 11, 2013 at 12:28 pm

    I think the admin of this website is actually working hard in favor of his web page, because here every data
    is quality based information.

  4. streitsachtunggefahr.blogspot.com June 26, 2013 at 1:45 pm

    Hello, this weekend is nice for me, because this moment i am reading this
    great informative article here at my residence.

  5. Bubbocine.Wordpress.Com July 29, 2013 at 10:15 am

    Oh my goodness! Impressive article dude! Thanks, However I am experiencing
    troubles with your RSS. I don’t understand why I can’t subscribe to it.
    Is there anybody else getting identical RSS problems?
    Anyone that knows the solution will you kindly respond?
    Thanx!!

  6. lilith83.wordpress.com August 3, 2013 at 10:42 pm

    Post writing is also a fun, if you be acquainted with then you can
    write otherwise it is complicated to write.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: