Sustained Economic Growth and the Financial System

Franklin Allen and Hiroko Oura
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Hiroko Oura: U PA

Monetary and Economic Studies, 2004, vol. 22, issue S1, 95-119

Abstract: Traditional growth theory does not include financing and suggests that growth will be continuous. In fact, however, growth is often discontinuous. In some periods, there are booms with rapid growth that end in financial crises with low growth for sustained periods. This paper argues that the financial system plays a crucial role in understanding these variations in growth. High growth may require that firms and entrepreneurs take non-diversifiable risks to obtain high returns. This risk taking may lead to high growth but also to frequent crises. Although growth followed by crisis can be beneficial, this is not always the case. When a crisis follows the bursting of a bubble in asset prices, it can have very negative impacts on growth, as in the U.S. Great Depression or in Japan in the 1990s. For sustained growth, policy should be devoted to avoiding bubbles, contagion, and financial fragility.

JEL-codes: E32 E44 N12 N15 N22 N25 O47 (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imemes:v:22:y:2004:i:s1:p:95-119

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