Research Discussion Papers, Bank of Finland
No 21/2010:
Effect of finance on growth through more efficient utilization of technological innovations
Pasi Ikonen ()
Abstract: This paper models the effects of financial development on
economic growth through better or more efficient utilization of
technological innovations. The model is based on the endogenous growth
theory of Aghion and Howitt and its derivatives, especially the growth
model of Aghion, Howitt and Mayer-Foulkes, which covers the effect of
financial development on convergence. The main contribution of this paper
is to model the innovation channel of finance explicitly. The paper focuses
particularly on the interaction term between the measure of own innovation
and financial development. As countries approach the technological
frontier, own innovation becomes more important to sustain a high growth
rate. An adequate level of financial development is needed to realize the
full potential of own innovation for economic growth. The data covers the
period 1960–2007 for anvanced economies, emerging markets and some other
countries for which data are available. In estimation of the model,
different regression specifications for the data panel are applied. The
robustness of the results is also tested in several ways. The results show
a significant and positive sign for the interaction term between the
measure of own innovation and financial development in the most important
configurations. This suggests that the innovation channel of finance is
likely to have a positive role to play in economic growth.
Keywords: endogenous growth; innovation; financial development; growth empirics; (follow links to similar papers)
JEL-Codes: O31; O33; O47; (follow links to similar papers)
44 pages, December 23, 2010
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