Discussion Paper Details

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Title: A Traffic-Jam Theory of Growth

Author(s): Daria Finocchiaro and Philippe Weil

Publication Date: May 2022

Keyword(s): Finance, growth and search frictions

Programme Area(s): Macroeconomics and Growth and Monetary Economics and Fluctuations

Abstract: A growing empirical literature documents a non-monotonic relationship between finance and growth. We investigate this finding in a Schumpeterian endogenous-growth model with search frictions and congestion effects in credit and innovation markets. Financial development eases the financing of innovation but exacerbates congestion effects in R&D. Conversely, policies that promote R&D aggravate financial bottlenecks. Once general equilibrium feedback effects are taken into account, the interplay between the two congestion frictions generates a non-linear relationship between finance and productivity growth. We show that, for a calibration chosen to mimic the actual US economy, the interplay between credit and innovation frictions results in a negative impact of finance on growth. This impact is however quantitatively small ?? consistent with the observation that, in the last century, most developed economies have experienced a widespread expansion of the financial sector yet almost constant, or slowly declining, growth rates of GDP (save for financial crises, pandemics or wars).

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Bibliographic Reference

Finocchiaro, D and Weil, P. 2022. 'A Traffic-Jam Theory of Growth'. London, Centre for Economic Policy Research.