Finance, Growth, and Inequality

IMF Working Papers, June 11, 2021

Source details

Field emergence: Finance and growth emerged as a distinct field of economics during the last three decades as economists integrated the fields of finance and economic growth and explored ramifications of financial systems on economic growth, income distribution, and poverty.
Paper purpose: Reviews theoretical and empirical research on connections between the operation of the financial system and economic growth and inequality.
Tentative role of innovation: Financial innovation—improvements in the ability of financial systems to ameliorate information and transaction costs—may be necessary for sustaining growth.

Financial development spurs growth:
- "(1) financial development—both the development of banks and stock markets—spurs economic growth."
Channels of impact:
- "(2) better functioning financial systems foster growth primarily by improving resource allocation and technological change, not by increasing saving rates."
Distributional effects:
- "Some research also suggests that financial development expands economic opportunities and tightens income distribution, primarily by boosting the incomes of the poor."
Interpretation:
- "This work implies that financial development fosters growth by expanding opportunities."

Primary growth mechanisms:
- Improving resource allocation.
- Promoting technological change.
Not primary mechanism:
- Increasing saving rates is not the primary way financial development fosters growth, per the review.
Role in inequality:
- Financial development can tighten income distribution by boosting incomes of the poor, thereby expanding opportunities.
Financial innovation:
- Improvements that reduce information and transaction costs may be necessary to sustain growth, offered more tentatively.

Author: Ross Levine
Publication date: June 11, 2021
Series: Working Paper No. 2021/164
Issue: 164
Volume: 2021
Pages: 80
DOI: https://doi.org/10.5089/9781513583365.001
Stock No: WPIEA2021164
ISBN: 9781513583365
ISSN: 1018-5941
Subject tags: Economic sectors, Financial crises, Financial markets, Financial sector development, Income, Income distribution, Income inequality, National accounts, Stock markets
Keywords: cost of capital, fields of finance, Financial sector development, Global, Income, Income distribution, Income inequality, incomes of the poor, producing information, resource allocation, spurs economic growth, Stock markets

IMF Working Papers — "Finance, Growth, and Inequality" by Ross Levine (Working Paper No. 2021/164, June 11, 2021).