Associate Professor Zeng Hua,   Professor Li Kai  

School of Business Administration, Northeastern University,
Shenyang, China, Liaoning, Shenyang, 110004)
hzeng@mail.neu.edu.cn

Integrating with an economic growth model, the article conducts a long-term analysis of the relationship between finance and economic growth in a dynamic perspective. It suggests that equilibrium growth rate relies on the efficiency of financial department, time discount rate, and production elasticity of capital. It concludes that there is a positive correlation between equilibrium growth rate, and efficiency of financial department and production elasticity. It also concludes that there is a negative correlation with time discount rate. The more efficient the financial department is, the greater the economic growth rate will be. Higher capital elasticity brings about greater marginal production, namely, greater economic growth. With a low time discount rate, people are more willing to postpone consumption and the current saving rate becomes higher, which produces a higher economic growth rate. Note: Although equilibrium growth rate is relevant to the growth rate of population or labor, economy would still grow despite a zero or negative growth rate of population or labor. Lastly, the article discusses the necessary characteristics of an efficient financial market: (1) the liquidity in the financial market should be low and financial structure should be reasonable; (2) there should be a sensible interest system in the financial market to allocate resources, and (3) society should be highly competent in mobilizing savings.