The role of capital market efficiency in long-term growth: A quantitative exploration

A computable neoclassical model with financial intermediation is used first to explain the falling Euler equation tax wedge of S. Korea and Taiwan between 1966 and 2006 and then to explore the hypothesis that more efficient financial intermediation enhances growth. The analysis reveals that improved efficiency reduces the tax wedge of 1966–1980 by more than 58%. Moreover an improvement in financial efficiency generally results in a higher steady state output by raising the percentage of household savings intermediated and not by raising saving rates. Accordingly, financial efficiency improves welfare and positively contributes to long-term growth.