Why does financial sector growth crowd out real economic growth?

Stephen Cecchetti and Enisse Kharroubi

No 490, BIS Working Papers from Bank for International Settlements

Abstract: In this paper we examine the negative relationship between the rate of growth of the financial sector and the rate of growth of total factor productivity. We begin by showing that by disproportionately benefiting high collateral/low productivity projects, an exogenous increase in finance reduces total factor productivity growth. Then, in a model with skilled workers and endogenous financial sector growth, we establish the possibility of multiple equilibria. In the equilibrium where skilled labour works in finance, the financial sector grows more quickly at the expense of the real economy. We go on to show that consistent with this theory, financial growth disproportionately harms financially dependent and R&D-intensive industries.

Keywords: growth; financial development; credit booms; R&D intensity; financial dependence (search for similar items in EconPapers)
Pages: 31 pages
Date: 2015-02
New Economics Papers: this item is included in nep-eff and nep-fdg
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Citations: View citations in EconPapers (189)

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Working Paper: Why does financial sector growth crowd out real economic growth? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:490

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