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Financial sector bargaining power, aggregate growth and systemic risk

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  • Emanuele Ciola

    (Università Politecnica delle Marche
    Universitat Jaume I)

Abstract

Recent decades have seen a substantial increase in the size and influence of the financial industry in advanced economies. Mainstream theory states that the financial sector can increase the efficiency and stability of the real economy by reducing informational asymmetries and transaction costs. Nevertheless, the rise of the financial industry has been accompanied by lower aggregate growth, increased inequality and declining financial stability. With this in mind, the main aim of the present article is to provide a different perspective on the rise of finance in developed countries, by focusing on the impact of financial markets on aggregate growth and economic (in)stability. Specifically, we analyse the role of the bargaining power of financial intermediaries in promoting (or reducing) the entrance of new enterprises in the market and find that the financial sector is essential for the good functioning of the real economy, but that an overdeveloped financial industry can reduce the incentive for new firms to start production, resulting in a negative impact on aggregate growth and economic stability.

Suggested Citation

  • Emanuele Ciola, 2020. "Financial sector bargaining power, aggregate growth and systemic risk," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(1), pages 89-109, January.
    • Handle: RePEc:spr:jeicoo:v:15:y:2020:i:1:d:10.1007_s11403-019-00270-5
    DOI: 10.1007/s11403-019-00270-5
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    More about this item

    Keywords

    Financial development; Entrepreneurship; Firm financing; Growth; Systemic risk;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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