Finance and growth – lessons from the literature and the recent crisis

This piece argues that by intermediating society’s savings and allocating them to their best uses, financial systems have a critical function for economies’ growth. However, financial sectors can also be a source of fragility. Critically, recent policy approaches towards the financial sector have focused more on the size of the sector rather than its intermediating function, which might have led to short-run growth at the expense of high volatility. Reducing the financial safety net subsidy and adjusting the regulatory framework strengthening incentives towards intermediation will not only make the financial system safer but also increase the growth benefits of finance for the real economy.