Abstract

Financial liberalization models have been for the last nineteen years the foundation
of mainstream thinking on the role of financial markets and institutions in economic
development and the basis for policymaking in many LDCs. This paper presents a critical
appraisal of the financial liberalization literature and points to an alternative view based on
Post Keynesian theory. That alternative view is based on three aspects of monetary economics.
First savings does not provide finance: the role of savings is not related to the financing
of capital accumulation, but to its funding. Second, capital accumulation increases banks’
fragility, which can be alleviated through funding. Finally, how we model the finance-investment-
saving-funding circuit depends on institutions and conventions, which are evolving.

JEL Classification: E21; E22; E12; G00.