Banking Efficiency and the Economic Transition Process

Nabi, Sami; Rajhi, Taoufik

Revue des sciences commerciales et de gestion
Volume 4, Numéro 1, Pages 109-149
2005-04-30

Banking Efficiency And The Economic Transition Process

Authors : Nabi Sami . Rajhi Taoufik .

Abstract

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. The 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 the capital 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 is conditioned by the credit market perfection. We also show that efficient banks make the economy more resistant 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 transition process by several years. This negative impact is more severe when theconomy is at the beginning of its transitional process and when its credit market is more imperfect.