DP17304 A Traffic-Jam Theory of Growth

Author(s): Daria Finocchiaro, Philippe Weil
Publication Date: May 2022
Keyword(s): Finance, growth, search frictions
JEL(s): E40, E50
Programme Areas: Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17304

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 â?? 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).