Financial Sector Development, Savings and Economic Performance: A Theoretical Analysis

Abstract

Purpose: This paper investigates the intricate relationship between financial sector development (FSD), savings behavior (SB), and economic performance (EP). Motivated by the critical role of the financial sector in economic development, our research aims to understand the nature of this relationship, addressing existing gaps in the literature. Methodology: The methodology used involves a literature review, the development of a theoretical model with clearly stated assumptions, and the formulation of a mathematical model to represent the relationships between key variables. A deductive approach to theoretical analysis is employed for the discussion and interpretation of findings, along with implications for policy and future research directions. Findings: The proposed theoretical model assumes rational economic agents, efficient financial markets, perfect information, and other factors to analyze these relationships. Mathematically, FSD positively influences SB, subsequently enhancing EP indicators like GDP growth, income distribution, and employment. The discussion aligns findings with existing literature, emphasizing implications for policymakers to prioritize FSD, enhance financial literacy, and incentivize savings. Unique contributor to theory, policy and practice:  Acknowledging model limitations, future research should validate findings empirically, considering diverse economic conditions. This model contributes to understanding dynamic economic interactions, guiding empirical investigations and policy formulation concisely.