Economic Growth, Convergence Clubs, and the Role of Financial Development

This paper aims to show and test the existence of a poverty trap linked to the development of the banking sector. Our theoretical model exhibits multiple steady state equilibria due to a reciprocal externality between the banking sector and the real sector. Growth in the real sector causes the financial market to expand, thereby increasing banking competition and efficiency. In return, the development of the banking sector raises the net yield on savings and enhances capital accumulation and growth. The aim of our econometric tests is to check the existence of multiple steady states associated with financial and educational development.