10.1.1.36.1123 - Department of Economics Economic Research...

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Department of Economics Economic Research Paper No. 00/6 Flow of funds: Implications for Research on Financial Sector Development and the Real Economy Christopher J. Green and Victor Murinde March 2000
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Centre for International, Financial and Economics Research Department of Economics Loughborough University Loughborough Leics., LE11 3TU UK Tel: + 44 (0)1509 222734 Fax: + 44 (0) 1509 223910 Email: [email protected] Director : Dr Eric J Pentecost Deputy Director : Professor C J Green Associate Directors: Professor Kenneth J Button,George Mason University, USA Professor Peter Dawkins, University of Melbourne, Australia Professor Robert A Driskill, Vanderbilt University, USA Professor James Gaisford, University of Calgary, Canada Professor Andre van Poeck, University of Antwerp, Belgium Professor Amine Tarazi, University of Limoges, France
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1 Flow of funds: Implications for Research on Financial Sector Development and the Real Economy : by Christopher J. Green, Department of Economics, Loughborough University Victor Murinde, Birmingham Business School, The University of Birmingham Keywords : flow of funds; intersectoral financial flows; poverty-reducing economic growth JEL Classification No : G1, E44, E43 Abstract This paper provides a selective survey of the leading theoretical and empirical issues surrounding the flow of funds: its meaning and origin, problems of construction, and more particularly the key issues involved in financial modelling. It is argued that there is an intimate connection between the flow of funds, interest rate and asset price determination, and hence incomes and expenditures in an economy. The paper also explores the reasons for lack of success at empirical flow of funds modelling and proposes “promising research ideas” (PRIs) for future research on the relationship between financial sector development and the real economy, especially in order to identify effective financial sector policies for promoting poverty-reducing economic growth in low-income developing countries. Correspondence to: Victor Murinde, Birmingham Business School, The University of Birmingham, Edgbaston, Birmingham B15 2TT, United Kingdom. Tel: 0121-414-6704, Fax: 0121-414-6238, E-mail:[email protected] d:\papers\fad-dfid\fof\FD-fof1wp.doc : Useful comments were received from participants at the Management Committee meeting for the DFID-funded Finance and Development Research Programme held on April 15, 1999 at The University of Birmingham, where a preliminary version of this paper was presented. The interpretations and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to DFID.
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2 1. Introduction Flow of funds analysis provides a general framework for studying a wide range of issues concerning the financial sector and its relationships with the real economy. It has been widely used in the industrial economies as a basic information tool, in general empirical
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10.1.1.36.1123 - Department of Economics Economic Research...

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