Financial intermediation in Estonia

Idäntalouksien katsauksia - Review of Economies in Transition
Financial intermediation in Estonia
2/1995
Author(s):
Urmas Sepp
1995. 38 pages / sivua.
Publisher:
Suomen Pankki - Finlands Bank
ISSN:
1235-7405
(Web publication)
 
Introduction
The view that financial intermediation favours economic growth and development is generally accepted. Efficient financial intermediation tends to increase the savings rate and accelerate the rate of capital formation.

Still the importance of the financial sector to growth is not limited to the accumulation of resources. R. Levine stresses that productivity improvements are at least as important as the savings rate (Levine 1994, p.5). Much of the contribution of financial intermediation to economic growth is in the a promotion of efficient allocation of resources.

The role of financial intermediation in economic development is discussed in the classic work of Goldsmith (1969). The most recent advance in this field is the endogenous growth model of R. King and R. Levine, which highlights the connections between finance, entrepreneurship and economic growth (see Levine 1994, King Levine 1992, King Levine 1993).

The aim of the present paper is to describe financial intermediation in Estonia. The paper starts with a short description of the Estonian financial sector.
The next section presents the macroeconomic indicators for financial intermediation in Estonia. It seems reasonable to look for the causes of weak domestic intermediation in the money supply. In the fourth section the Estonian money supply indexes are compared with those of other countries.
In the remaining sections of the paper the adequacy of the results of preliminary analysis will be studied. First, I check the representativeness of the indicators estimated for 1993.

In the next two sections the reasons for the low deposit money supply and low level of financial intermediation are analyzed through the behaviour and preferences of the public and the commercial banks. The treatment is based on aggregate data. Therefore, the portfolio behaviour of financial intermediagies is not discussed in detail.
The last section of the paper describes the latest developments in financial intermediation in Estonia.
The paper ends with a summary of the conclusions.




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