This paper explores the channels through which innovations in the financial sector lead to economic growth. The channels identified are capital accumulation and technological innovation. The first is fulfilled by financial intermediaries which transform household savings into productive investment by firms, the second by venture capitalists which fund risky technological projects with high potential payoffs. The rate of financial innovation is determined by the amount of labor (or human capital) devoted to the sector as well as by spillovers from existing fi- nancial products. By embedding such a sector into the Romer (1990) - Jones (1995) and Lucas (1988) - Uzawa (1965) frameworks, it is shown that ultimately, financial innovations can only lead to long-run growth through its venture capital role. The transformative role of the financial sector only leads to temporary growth effects on the transitional path to the steady state.
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Length: 36 pages Date of creation: 2001 Date of revision: Handle: RePEc:mlb:wpaper:804
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Find related papers by JEL classification: G20 - Financial Economics - - Financial Institutions and Services - - - General O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Tsiddon, Daniel, 1992.
"A Moral Hazard Trap to Growth,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 299-321, May.
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