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Evening Must-Read: Stephen G Cecchetti and Enisse Kharroubi: Why Does Financial Sector Growth Crowd Out Real Economic Growth?

Stephen G Cecchetti and Enisse Kharroubi (2014): Why Does Financial Sector Growth Crowd Out Real Economic Growth? (Basel: BIS) http://equitablegrowth.org/?p=9307 "We... concluded that the level of financial development is good only up to a point...

...after which it becomes a drag on growth, and that a fast-growing financial sector is detrimental.... Financial sector growth benefits disproportionately high collateral/low productivity projects... the strong development in sectors like construction, where returns on projects are relatively easy to pledge as collateral but productivity (growth) is relatively low.... Where financiers employ the [most] skilled workers... productivity growth is lower than it would be had... entrepreneurs attract[ed] the [most] skilled labour.... [Thus] financial booms in which skilled labour work for the financial sector, are sub-optimal when the bargaining power of financiers is sufficiently large.... We focus on manufacturing industries and find that industries that are in competition for resources with finance are particularly damaged by financial booms... manufacturing sectors that are either R&D-intensive or dependent on external finance suffer disproportionate reductions in productivity growth when finance booms...

http://www.bis.org/publ/work490.pdf

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