Financial Innovations And Endogenous Growth

M.S. Chin and Y.K. Chou

No 804, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: This paper explores the channels through which innovations in the financial sector lead to economic growth. The channels identified are capital accumulation and technological innovation. The first is fulfilled by financial intermediaries which transform household savings into productive investment by firms, the second by venture capitalists which fund risky technological projects with high potential payoffs. The rate of financial innovation is determined by the amount of labor (or human capital) devoted to the sector as well as by spillovers from existing fi- nancial products. By embedding such a sector into the Romer (1990) - Jones (1995) and Lucas (1988) - Uzawa (1965) frameworks, it is shown that ultimately, financial innovations can only lead to long-run growth through its venture capital role. The transformative role of the financial sector only leads to temporary growth effects on the transitional path to the steady state.

Keywords: ECONOMIC GROWTH; TECHNOLOGICAL CHANGE; FINANCIAL ANALYSIS (search for similar items in EconPapers)
JEL-codes: G20 O31 O33 O41 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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