2017/30 LEM Working Paper Series

Innovation, Finance, and Economic Growth: An Agent-Based Approach

Giorgio Fagiolo, Daniele Giachini and Andrea Roventini
Agent-based Models, Innovation, Exploration vs. Exploitation, Endogenous Growth, Banking Sector, Finance-Growth Nexus

  JEL Classifications
C63, G21, O30, O31

This paper extends the endogenous-growth agent-based model in Fagiolo& Dosi (2003) to study the finance-growth nexus. We explore industries where firms produce a homogeneous good using existing technologies, perform R&D activities to introduce new techniques, and imitate the most productive practices. Unlike the original model, we assume that both exploration and imitation require resources provided by banks, which pool agent savings and finance new projects via loans. We find that banking activity has a positive impact on growth. However, excessive financialization can hamper growth. Indeed, we find a significant and robust inverted-U shaped relation between financial depth and growth. Overall, our results stress the fundamental (and still poorly understood) role played by innovation in the finance-growth nexus.
download pdf