4. Conclusion
In this paper, we study the complex real effects of financial development and come to two
important conclusions. First, financial sector size has an inverted U-shaped effect on
productivity growth. That is, there comes a point where further enlargement of the financial
system can reduce real growth. Second, financial sector growth is found to be a drag on
productivity growth. Our interpretation is that because the financial sector competes with the
rest of the economy for scarce resources, financial booms are not, in general, growth-enhancing.
This evidence, together with recent experience during the financial crisis, leads
us to conclude that there is a pressing need to reassess the relationship of finance and real
growth in modern economic systems. More finance is definitely not always better.
