Effects of financial intermediation on real variables: a discrete-time dynamical framework

Abstract This paper develops a discrete-time model to investigate the impact of financial intermediation on economic growth in an economy composed of households, firms, and banks. The model is initially formulated in a general framework, allowing for flexibility in both the utility function and the financial intermediation technology. In a subsequent specification, we adopt a modified Constant Elasticity of Substitution (CES) utility function and assume a constant share of labor employed by each bank, leading to a two-dimensional dynamical system. Our analysis shows that the model’s behavior is sensitive to the choice of utility function: multiple dynamical scenarios emerge as the savings rate changes. We identify key economic parameters – specifically, the number of banks, the rate of change in the share of employment per bank, and the rate of change in savings – and assess their influence through sensitivity analysis. Additionally, we explore the joint effects of these parameters using Monte Carlo simulations. The results highlight the complex interplay between financial intermediation and macroeconomic dynamics, offering new insights into the structural determinants of economic growth.