Technological Progress, Slow Growing Economies and Polarization

Slow technological progress and financial sectors with low productivity are endemic among developing countries. This paper presents a model in which technological progress a.ects the productivity of the financial sector. When the technological progress is fast, the financial intermediation costs are low and this increases the incentives to invest in new technology. This feed back process involves the existence of two types of balanced growth path equilibria: one in which the productivity of the financial sector is high and the technological progress fast, and other in which the productivity of the financial sector is low and the technological progress slow. It also may appear an steady state in which there is neither financial sector nor technological progress. Multiple equilibria and indeterminacy of equilibria may arise: for given initial conditions, there are several equilibrium paths converging to different balanced growth paths with di.erent growth rates.