Financial Development, Growth, and Crisis : Is There a Trade-Off?
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 grow...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2017
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/512501510080248213/Financial-development-growth-and-crisis-is-there-a-trade-off http://hdl.handle.net/10986/28856 |
| Summary: | 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. |
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