342 18. Modelling growth and financial intermediation through information frictions: a critical survey Salvatore Capasso 18.1. INTRODUCTION Considerable empirical evidence has shown strong linkages between real and financial development. As economies grow, the relative size and complexity of financial systems tend to increase. New markets and financial instruments develop, while the role of financial intermediaries tends to change. Financial intermediation, very limited in the early stages of economic development, becomes increasingly important with economic growth. However, as economies continue to grow, better organised financial markets facilitate the direct transfer of resource between lenders and borrowers: stock markets develop and financial intermediaries play a decreasing role, in relative terms, in the credit market. The idea that financial markets affect the real allocation of resources and influence capital accumulation and growth is a very old one in economics. Bagehot (1862) firmly believed that capital in England was more productive than in other countries because, in England, larger and better organised capital markets were channelling resources towards more productive investments. Schumpeter (1934), on the other hand, stressed the role of financial intermediation, and in particular of banks, in improving resource allocation and enhancing the aggregate productivity of capital. More recently, Hicks (1969), in highlighting the importance of financial markets, suggested that the industrial revolution was not the result of innovations and the development of new technologies, but rather the result of the expansion of financial systems that allowed the applications of these technologies. In recent years, new research has attempted to provide a rigorous theoretical interpretation of the linkages between the real and financial side of the economy. In the wake of the works by Gurley and Shaw (1955, 1960, 1967), Goldsmith (1969) and McKinnon (1973), a great number of studies