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...
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World Bank, Washington, DC
2017
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| 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 |
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okr-10986-288562021-06-08T14:42:47Z Financial Development, Growth, and Crisis : Is There a Trade-Off? Loayza, Norman Ouazad, Amine Ranciere, Romain FINANCE DEVELOPMENT ECONOMIC GROWTH PRODUCTIVITY ECONOMIC SHOCKS VOLATILITY RISK MACROPRUDENTIAL POLICY 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. 2017-11-14T21:59:41Z 2017-11-14T21:59:41Z 2017-11 Working Paper http://documents.worldbank.org/curated/en/512501510080248213/Financial-development-growth-and-crisis-is-there-a-trade-off http://hdl.handle.net/10986/28856 English Policy Research Working Paper;No. 8237 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
| repository_type |
Digital Repository |
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Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
FINANCE DEVELOPMENT ECONOMIC GROWTH PRODUCTIVITY ECONOMIC SHOCKS VOLATILITY RISK MACROPRUDENTIAL POLICY |
| spellingShingle |
FINANCE DEVELOPMENT ECONOMIC GROWTH PRODUCTIVITY ECONOMIC SHOCKS VOLATILITY RISK MACROPRUDENTIAL POLICY Loayza, Norman Ouazad, Amine Ranciere, Romain Financial Development, Growth, and Crisis : Is There a Trade-Off? |
| relation |
Policy Research Working Paper;No. 8237 |
| description |
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. |
| format |
Working Paper |
| author |
Loayza, Norman Ouazad, Amine Ranciere, Romain |
| author_facet |
Loayza, Norman Ouazad, Amine Ranciere, Romain |
| author_sort |
Loayza, Norman |
| title |
Financial Development, Growth, and Crisis : Is There a Trade-Off? |
| title_short |
Financial Development, Growth, and Crisis : Is There a Trade-Off? |
| title_full |
Financial Development, Growth, and Crisis : Is There a Trade-Off? |
| title_fullStr |
Financial Development, Growth, and Crisis : Is There a Trade-Off? |
| title_full_unstemmed |
Financial Development, Growth, and Crisis : Is There a Trade-Off? |
| title_sort |
financial development, growth, and crisis : is there a trade-off? |
| publisher |
World Bank, Washington, DC |
| publishDate |
2017 |
| url |
http://documents.worldbank.org/curated/en/512501510080248213/Financial-development-growth-and-crisis-is-there-a-trade-off http://hdl.handle.net/10986/28856 |
| _version_ |
1764467880921923584 |