Department of Economics. University of Melbourne. Melbourne Victoria 3010 Australia

ABSTRACT

This paper examines the symbiosis between financial development and human capital accumulation in generating endogenous growth. We develop a theoretical model where human capital is a key factor in the creation of financial innovations, resulting in financial development which in turns facilitates the acquisition of new human capital. Comparing the steady state solutions of the decentralized model with those of a hypothetical social planner reveals two sources of divergence between the solutions. In addition, we explore the comparative statics and transitional dynamics of these models, and examine their key implications for policy-makers.