Understanding Finance's Potential for Growth and for Crisis

The financial sector is vital to economic growth; but finance is also a cause of crises. This two-sided potential is missing in most of today’s theoretical models and empirical research – the key reason why the 2007-8 credit crisis came as a surprise to leading policy and research institutions.

This project will build on theory indicating that credit flows to the real sector have systematically different effects from financial flows to asset markets. A second innovation is to compile a dataset of credit flows in OECD countries over the last decades in order to test these effects. The results will improve our understanding of financial causes of growth, productivity and financial instability. It is hoped that this will support more effective policies to harness finance for sustainable growth.