Financial Innovations and EndogenousGrowth

This paper explores the channels through which innovations in the financial sector lead to economic growth. The channels identified are capital accumulation and technological innovation. The first is fulfilled by financial intermediaries which transform household savings into pro-ductive investment by firms, the second by venture capitalists which fund risky technological projects with high potential payoffs. The rate of financial innovation is determined by the amount of labor (or human capital) devoted to the sector as well as by spillovers from existing fi-nancial products. By embedding such a sector into the Romer (1990)