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The study examines how financial development impacts economic growth within a specific model.

March 14, 2026Journal of Monetary Economics0 citationsOpen Access

A traffic-jam theory of growth

DFDaria FinocchiaroSwedish National Bank PWPhilippe WeilUniversité Libre de Bruxelles

Key Points

The study examines how financial development impacts economic growth within a specific model.
Analyzed an endogenous growth model incorporating search and congestion frictions in credit and R&D.
Investigated the interaction of these frictions and their effects on growth.
Calibrated the model to reflect characteristics of the U.S. economy.
Established a non-monotonic, inverted-U relationship between financial development and growth.
Identified that excessive financial development can hinder technological progress.
Found that the negative impact of finance on growth in the U.S. context is quantitatively small.

Abstract

We investigate the growth–finance nexus in an endogenous growth model with search frictions and congestion effects in credit and innovation markets. The interaction between these two frictions generates a non-monotonic, inverted-U relationship between financial development and growth. Financial development exerts two opposing forces: a direct positive finance channel by easing access to funding and an indirect negative congestion channel, as greater financial activity draws more firms into R effect modest in U.S. calibration.

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