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Finance and Inclusive Growth

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Finance and Inclusive Growth

OECD,

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The massive growth of credit and equity markets in OECD countries has opened up an unintended can of worms.

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7

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The massive upsurge in private sector credit and stock market capitalization in OECD countries in recent decades has been both a blessing and a bane. While the increased availability of debt and equity finance can help promote economic output, too much of a good thing can quickly become bad. OECD economists Boris Cournède, Oliver Denk and Peter Hoeller investigate this tendency and offer essential insights into the complex interplay of finance and the real economy, which getAbstract suggests to policy makers, financial professionals and regulators.

Summary

In OECD countries, equity markets’ capitalization and credit extended to the private sector have tripled relative to GDP since the 1960s and 1970s, respectively, with both positive and negative impacts. The constructive effects include the productive allocation of capital, enhanced international trade and financial-sector productivity gains that spill into other parts of the economy. But a large financial sector can slow economic growth by misdirecting funds – because of tax incentives or hidden credit risks – to projects with less potential, which expands risk, spawns booms and busts, and intensifies income inequity.

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About the Authors

Boris Cournède, Oliver Denk and Peter Hoeller are OECD economists.

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