Understanding Finance's Potential for Growth and for Crisis

This research project builds on theory indicating that credit flows to the real sector have systematically different effects from financial flows to asset markets.

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, which is the key reason why the 2007-8 credit crisis came as a surprise to leading policy and research institutions. This project compiles a dataset of credit flows in OECD countries over the last decades in order to test the effects of these flows to the real sector. The results improve the understanding of financial causes of growth, productivity, and financial instability which will support more effective policies to harness finance for sustainable growth.