Banking, Credit Market Imperfection and Growth

We develop a new model that links capital market imperfection to banking emergence and economic growth. It is shown that the banking system emerges endogenously after a first stage of slow economic growth. Interestingly, economic growth increases after the emergence of banking but remains under its potential level. This is due to a credit rationing brake which decreases progressively as the economy develops. Another finding is that a reduction of credit market imperfection reduces the credit rationing stage.