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Finance and Development

Surveys of Theory, Evidence and Policy

Edited by Christopher J. Green, Colin Kirkpatrick and Victor Murinde

In this valuable new book, a distinguished group of authors takes stock of the existing state of knowledge in the field of finance and the development process. Each chapter offers a comprehensive survey and synthesis of current issues. These include such critical subjects as savings, financial markets and the macroeconomy, stock market development, financial regulation, foreign investment and aid, financing livelihoods, microfinance, rural financial markets, small and medium enterprises, corporate finance and banking.
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Chapter 3: Flow of Funds: The Relationship between Finance and the Macroeconomy

Christopher J. Green and Victor Murinde


3. Flow of funds: the relationship between finance and the macroeconomy Christopher J. Green and Victor Murinde 1. INTRODUCTION The flow of funds is an accounting framework and not a theory or a policy prescription. However, this framework and the data available within it provide the basis for a wide range of applied analyses of economic problems and policies. Most importantly, flow of funds analysis provides a general framework for studying the financial sector and its relationships with the real economy. Flow of funds has been widely used in the industrial economies as a basic information tool, in general empirical research, and for detailed financial policy analysis. See Green (1992) for a review of this work. Dawson (1996) provides several interesting examples of flow of funds applications. A comprehensive search for relevant literature indicates that relatively little flow of funds work has been done for developing countries. In part, the paucity of work on flow of funds can be explained by an almost complete absence of sufficiently detailed data in most developing countries. Murinde (1996) gives examples of flow of funds data and applications in several developing countries; Fleming and Giugale (2000) provide examples for the transition economies of central and eastern Europe. The absence of flow of funds data in developing economies is unfortunate, for it can be argued that flow of funds analysis may be of more value in the developing world than in the industrial countries. Economic analysis and policy are based on both the prices...

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