An Evolutionary Growth Model with Banking Activity
41 Pages Posted: 10 Jun 2017
Date Written: January 1, 2017
In this paper, we propose an evolutionary growth model in which an innovative production sector interacts with a simplified banking sector. We explore the relationships between long-term sources of growth (technological change), and short-term/mid-term factors (such as price dynamics and interest rates). The model suggests new explanations for the endogenous emergence of sharp crises with profound effects in the long run. An interesting aspect of the model is that these crises appear in a strictly private economy, in which everything produced is sold, there are no government distortions, and there are no exogenous shocks. The crises emerge from the interactions between uneven innovation rates and market reactivity. In fact, high reactivity in financial markets can amplify the (initially small) effects of innovative competition, leading to a destabilization of economic growth. Drawing on the model results we suggest some policy implications.
Keywords: Innovation, Evolutionary Economics, Economic Growth, Banking, Crises
JEL Classification: B52, O42, E52
Suggested Citation: Suggested Citation