18 November 2011

Bigger financial sector, bigger GDP?

Apparently not, Gunther Capelle-Blancard and Claire Labonne recently found no evidence that for a clear and positive relationship between finance and growth.

This is because while financial deepening may generatea certain positive effects on growth (e..g: through more optimal capital allocation and diversifying risk), it also hurts growth through two mechanisms:  

1) It generates a bubble in the credit market which - as has been witnessed recently - may have slightly adversed effects on economic performance;

2) It distorts the allocation of talents in the economy.

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