Why does financial sector growth crowd out real economic growth?

Download Document

Date Published 2013
Primary Author Stephen G. Cecchetti
Other Authors Enisse Kharroubi
Theme Housing Finance and the Economy


In this paper we examine the negative relationship between the rate of growth of finance and the rate of growth of total factor productivity. We begin by showing that by disproportionately benefiting highcollateral/ low-productivity projects, an exogenous increase in finance reduces total factor productivity growth. Then, in a model with skilled workers and endogenous financial sector growth, we establish the possibility of multiple equilibria. In the equilibrium where skilled labour works in finance, the financial sector grows more quickly at the expense of the real economy. We go on to show that consistent with this theory, financial growth disproportionately harms financially dependent and R&D-intensive industries.

< Back to Search Results