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Financial Deepening, Credit Crises, Human Capital and Growth

Sergio Salas () and Kathleen Odell

No 2020-01, Working Papers from Escuela de Negocios y Economía, Pontificia Universidad Católica de Valparaíso

Abstract: In spite of extensive research exploring the implications of financial matters for economic growth, a general equilibrium macroeconomic model of financial frictions with human capital as an engine of growth is lacking in the literature. This paper helps to fill this gap, proposing a model that includes endogenous growth, human capital, and financial constraints. We derive short-term and long-term predictions from the model. From a long run perspective, we explore the relationship between financial depth and growth, and predict that this relationship is non-monotonic. Higher financial depth is initially associated with higher growth, but at diminishing rates. Further increases in financial depth become growth detrimental. From a short-run perspective, we analyze the role of transitory financial disruptions in producing persistent economic changes, a phenomenon that arguably happened during the Great Recession and the years that followed. We propose an explanation for these persistent effects based on human capital.

Keywords: endogenous growth; financial depth; credit crunch; human capital; heterogeneous agents; fiscal policy (search for similar items in EconPapers)
JEL-codes: E44 O4 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-gro and nep-mac
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