EconPapers    
Economics at your fingertips  
 

Financial Development, Growth, and Crisis: Is There a Trade-Off?

Norman Loayza (), Amine Ouazad () and Romain Ranciere
Additional contact information
Romain Ranciere: University of Southern California

No 2017-114, Working Papers from Peruvian Economic Association

Abstract: This paper reviews the evolving literature that links financial development, financial crises, and economic growth in the past 20 years. The initial disconnect—with one literature focusing on the effect of financial deepening on long-run growth and another studying its impact on volatility and crisis—has given way to a more nuanced approach that analyzes the two phenomena in an integrated framework. The main finding of this literature is that financial deepening leads to a trade-off between higher economic growth and higher crisis risk; and its main conclusion is that, for at least middle-income countries, the positive growth effects outweigh the negative crisis risk impact. This balanced view has been revisited recently for advanced economies, where an emerging and controversial literature supports the notion of "too much finance," suggesting that there might be a threshold beyond which financial depth becomes detrimental for economic growth by crowding out other productive activities and misallocating resources. Nevertheless, the growth/crisis trade-off is alive and strong for a large share of the world economy. Recognizing the intrinsic trade-offs of financial development can provide a useful framework to design policies targeting financial deepening, diversity, and inclusion. In particular, acknowledging the trade-offs can highlight the need for complementary policies to mitigate the risks, from financial macroprudential policies to monetary policy frameworks that monitor the growth of credit and asset prices.

Keywords: Finance; Financial Deepening; Development; Growth; Productivity; Crisis; Volatility; Risk; Macroprudential Policies (search for similar items in EconPapers)
JEL-codes: E44 O40 G00 G01 G32 H12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg, nep-gro and nep-mac
Date: 2017-12
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://perueconomics.org/wp-content/uploads/2018/01/WP-114.pdf Application/pdf

Related works:
Working Paper: Financial Development, Growth, and Crisis: Is There a Trade-Off? (2018) Downloads
Working Paper: Financial development, growth, and crisis: is there a trade-off ? (2017) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:apc:wpaper:2017-114

Access Statistics for this paper

More papers in Working Papers from Peruvian Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Nelson Ramírez-Rondán ().

 
Page updated 2019-03-23
Handle: RePEc:apc:wpaper:2017-114