A Traffic-Jam Theory of Growth

Daria Finocchiaro and Philippe Weil

No 17304, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A growing empirical literature documents a non-monotonic relationship between finance and growth. We investigate this finding in a Schumpeterian endogenous-growth model with search frictions and congestion effects in credit and innovation markets. Financial development eases the financing of innovation but exacerbates congestion effects in R&D. Conversely, policies that promote R&D aggravate financial bottlenecks. Once general equilibrium feedback effects are taken into account, the interplay between the two congestion frictions generates a non-linear relationship between finance and productivity growth. We show that, for a calibration chosen to mimic the actual US economy, the interplay between credit and innovation frictions results in a negative impact of finance on growth. This impact is however quantitatively small – consistent with the observation that, in the last century, most developed economies have experienced a widespread expansion of the financial sector yet almost constant, or slowly declining, growth rates of GDP (save for financial crises, pandemics or wars).

Keywords: Growth; Finance; Search frictions (search for similar items in EconPapers)
JEL-codes: E40 E50 (search for similar items in EconPapers)
Date: 2022-05
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Related works:
Journal Article: A traffic-jam theory of growth (2026)
Working Paper: A Traffic-Jam Theory of Growth (2024)
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