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Financial Deepening, Credit Crises, Human Capital and Growth

Author

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  • Sergio Salas
  • Kathleen Odell

Abstract

In spite of extensive research exploring the implications of financial matters for economic growth, a general equilibrium macroeconomic model of financial frictions with human capital as an engine of growth is lacking in the literature. This paper helps to fill this gap, proposing a model that includes endogenous growth, human capital, and financial constraints. We derive short-term and long-term predictions from the model. From a long run perspective, we explore the relationship between financial depth and growth, and predict that this relationship is non-monotonic. Higher financial depth is initially associated with higher growth, but at diminishing rates. Further increases in financial depth become growth detrimental. From a short-run perspective, we analyze the role of transitory financial disruptions in producing persistent economic changes, a phenomenon that arguably happened during the Great Recession and the years that followed. We propose an explanation for these persistent effects based on human capital.

Suggested Citation

  • Sergio Salas & Kathleen Odell, 2020. "Financial Deepening, Credit Crises, Human Capital and Growth," Working Papers 2020-01, Escuela de Negocios y Economía, Pontificia Universidad Católica de Valparaíso.
  • Handle: RePEc:ucv:wpaper:2020-01
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    File URL: http://ene.pucv.cl/wp/2020/wp2020-01.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    endogenous growth; financial depth; credit crunch; human capital; heterogeneous agents; fiscal policy;

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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