Riccardo Faini CEIS Seminars

Financial Development and Economic Growth: Long Run Equilibrium and Transitional Dynamics
May, 18th 2018 (12:00-13:30)
Room B - 1st floor

Alberto Bucci (Università di Milano)

Riccardo Faini CEIS Seminars

joint with Simone Marsiglio

We analyze the impact of financial development on economic growth. Differently from previous studies that focus mainly on balanced growth path outcomes, we also analyze the transitional dynamics of our model economy by using a fi nance-extended Uzawa-Lucas framework where fi nancial intermediation affects both human and physical capital accumulation. We show that, under certain rather general conditions, economic growth may turn out to be non-monotonically related to fi nancial development (as suggested by the most recent empirical evidence) and that too much finance may be detrimental to growth. We also show that the degree of fi nancial development may affect the speed of convergence, suggesting thus that fi nance may play a crucial role in determining the length of the recovery process associated with exogenous shocks. Moreover, in a special case of the model, we observe that, under a realistic set of parameters, social welfare decreases with fi nancial development, meaning that even when finance positively affects economic growth the short term costs associated with fi nancial activities more than compensate their long run bene fits.