The Role of Financial Institutions in an Economic Growth Model with Renewable Natural Resource and Endogenous Technology

Abstract

This thesis presents a three-sector ¯nance-extended endogenous growth model with constant returns to scale in renewable natural resource production in combination with physical and technological capital. The purpose of this the- sis is to provide a theoretical framework that investigates whether and how ¯nancial institutions impact capital accumulation, output productivity and economic growth through the channel of renewable natural capital. Sound ¯nancial institutions improve savings and investments and also e®ectively al- locate resources in capital producing ventures that in return enhance output productivity and stimulate economic growth. In this model, renewable natu- ral capital will be used in the production of the ¯nal consumption good and the technological capital. I will solve the model along balanced growth path (BGP) and further discuss stability analysis and transitional dynamics of my model. I have found that renewable natural capital and technological capital accumulation positively depend on ¯nancial development therefore developing economies with a well developed ¯nancial sector display higher output growth and reach to the global frontier at a faster rate.