An evolutionary growth model with banking activity

In this paper, we propose an evolutionary growth model in which an innovative production sector interacts with a simplified banking sector. We explore the relationships between long-term sources of growth (technological change) and short-term/mid-term factors (such as price dynamics and interest rates). The model suggests new explanations for the endogenous emergence of sharp crises with profound effects in the long run. An interesting aspect of the model is that these crises appear in a strictly private economy, in which everything produced is sold, and there are neither government distortions nor exogenous shocks. The crises emerge from the interactions between uneven innovation rates and market reactivity. In fact, high reactivity in financial markets can amplify the (initially small) effects of innovative competition, leading to a destabilization of economic growth. Drawing on the results of the model we suggest some policy implications.