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Financial Innovations And Endogenous Growth

Author

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  • Chin, M.S.
  • Chou, Y.K.

Abstract

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.

Suggested Citation

  • Chin, M.S. & Chou, Y.K., 2001. "Financial Innovations And Endogenous Growth," Department of Economics - Working Papers Series 804, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:804
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    File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-00-01/804.pdf
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    References listed on IDEAS

    as
    1. Bose, Niloy & Cothren, Richard, 1996. "Equilibrium loan contracts and endogenous growth in the presence of asymmetric information," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 363-376, October.
    2. Demetriades, Panicos O. & Hussein, Khaled A., 1996. "Does financial development cause economic growth? Time-series evidence from 16 countries," Journal of Development Economics, Elsevier, vol. 51(2), pages 387-411, December.
    3. Ma, Chien-Hui & Smith, Bruce D., 1996. "Credit market imperfections and economic development: Theory and evidence," Journal of Development Economics, Elsevier, vol. 48(2), pages 351-387, March.
    4. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    ECONOMIC GROWTH ; TECHNOLOGICAL CHANGE ; FINANCIAL ANALYSIS;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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