Discussion paper

DP17304 A Traffic-Jam Theory of Growth

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).


Finocchiaro, D and P Weil (2022), ‘DP17304 A Traffic-Jam Theory of Growth‘, CEPR Discussion Paper No. 17304. CEPR Press, Paris & London. https://cepr.org/publications/dp17304