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Saturday, May 09, 2015

'Social Costs of the Financial Sector'

Via Tim Taylor, a quotation from Luigi Zingales ("watch video of the lecture or read the talk at his website"):

While there is no doubt that a developed economy needs a sophisticated financial sector, at the current state of knowledge there is no theoretical reason or empirical evidence to support the notion that all the growth of the financial sector in the last forty years has been beneficial to society. In fact, we have both theoretical reasons and empirical evidence to claim that a component has been pure rent seeking. ...
There is a large body of evidence documenting that on average a bigger banking sector (often measured as the ratio of private credit to GDP) is correlated with higher growth, both cross-sectionally and over time. ... [I]in this large body there is precious little evidence that shows the positive role of other forms of financial development, particularly important in the United States: equity market, junk bond market, option and future markets, interest rate swaps, etc. ...
If anything, the empirical evidence suggests that the credit expansion in the United States was excessive. The problem is even more severe for other parts of the financial system. There is remarkably little evidence that the existence or the size of an equity market matters for growth. ...  I am not aware of any evidence that the creation and growth of the junk bond market, the option and futures market, or the development of over-the-counter derivatives are positively correlated with economic growth. ...

Reminds me of this graph from the IMF blog:

Financial-deepening

    Posted by on Saturday, May 9, 2015 at 11:35 AM in Economics, Financial System | Permalink  Comments (57)


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