Market Oriented Banking, Economic Growth and International Financial Stability

The financial sector received little attention in the literature on macroeconomic policy, growth and development until fairly recently. In fact, post-war macroeconomics in both the Keynesian and monetarist traditions paid little or no attention to banks and other financial institutions. This is somewhat ironic because both approaches were well aware of the role of banks in propagating the Great depression. Nevertheless, banking research in the first few decades of the post war era was the interest of a few industry specialists whose work had little connection to main stream economics. This all began to change about twenty five years ago for three reasons. First, the literature on the theory of the banking firm began to develop. Second, the development literature started to discuss the role of the financial sector in growth (McKinnon, 1973). Third, the post-monetarist and post-Keynesian view of the transmission mechanism for monetary policy relies on