Sustained Economic Growth and the Financial System

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Sustained Economic Growth and the Financial System

Author Info

Allen, Franklin (U PA)
Oura, Hiroko (U PA)

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Franklin Allen

Abstract

Traditional growth theory does not include financing and suggests that growth will be continuous. In fact, however, growth is often discontinuous. In some periods, there are booms with rapid growth that end in financial crises with low growth for sustained periods. This paper argues that the financial system plays a crucial role in understanding these variations in growth. High growth may require that firms and entrepreneurs take non-diversifiable risks to obtain high returns. This risk taking may lead to high growth but also to frequent crises. Although growth followed by crisis can be beneficial, this is not always the case. When a crisis follows the bursting of a bubble in asset prices, it can have very negative impacts on growth, as in the U.S. Great Depression or in Japan in the 1990s. For sustained growth, policy should be devoted to avoiding bubbles, contagion, and financial fragility.

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Publisher Info
Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 22 (2004)
Issue (Month): S1 (December)
Pages: 95-119
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Handle: RePEc:ime:imemes:v:22:y:2004:i:s1:p:95-119

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
N12 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - U.S.; Canada: 1913-
N15 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - Asia including Middle East
N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
N25 - Economic History - - Financial Markets and Institutions - - - Asia including Middle East
O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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