What is the size of finance associated with?

An extensive economic literature (1) has examined the link between the size of finance and the economy. In particular, it has looked at : The link between the size of finance and growth, which may be non-linear (a high level of financial development is less effective at generating more growth); The link between the size of finance and total factor productivity, and therefore also long-term growth . T his link may result from the lower cost of capital in financially developed countries; The negative link between the size of finance and growth, as too much talent is attracted to finance (too many skilled jobs in finance); The link between the size of finance and the likelihood of financial crises, and therefore between the size of finance and the volatility of growth ( a large size of finance would lead to higher but also more variable growth ); The link between the size of finance and income inequality (because finance gives low-income individuals access to credit, it offset s the effect of inequality on demand ). A comparison between OECD countries suggests that: A large size of finance (as measured by employment in finance or by the size of financial assets) is positively associated with long-term growth and negatively associated with income inequality; The size of finance is not correlated with the variability of growth, credit or asset prices. These findings, which a re positive for financ ial depth , are quite surprising. See the exhaustive survey by: N. Loayza , A. Ouazad , R. Rancière (2018) “Financial Development, Growth and Crises: Is There a Trade-Off?” NBER Working Paper No. 24474 , April