The Financial Sector and Economic Development

Economic growth is one of the ultimate goals of any economic system. The relationship between the development of the financial system and economic growth is a subject of longtime debates. Although it seems that it has reached indicative consensus, economists still have different thoughts on the importance of financial system for the economic growth of one country. The primary purpose of banks is to mobilize otherwise idle resources for use in productive investment. A wide array of theoretical models has appeared in the growth and development literature in the past decade to formalize the link between financial-system functioning and the growth of the real economy. In comparison to the traditional growth models in which output was seen as a function of capital, labor, and disembodied technological progress, the current models provide a richer framework for interpreting the potential impact of financial systems. The main issue of this paper is to analyze the relation between development of the financial system and economic growth by using the secondary analysis of literature and historical descriptive analysis for empirical research. The purpose of research is to put the Macedonian banking system and its economic growth in comparative and historical perspective with the banking systems of Central and Southeastern Europe countries.