Financial Innovation and Economic Growth: Some Further Evidence from the UK, 1900-2003

Abstract

In this chapter, we assess the contribution of financial development to saving and economic growth in the UK in the 20th century. Financial development in this century has been by leaps and bounds along with a number of infamous crashes like the ones in the 1920s and in 1987. Using annual time-series data for the whole century, we find that financial growth has helped saving and economic growth in the UK throughout the 20th century. The unprecedented increase in money holding in 1965 and various forms of financial innovation and liberalisation initiated in the 1980s raised both the level and the rate of economic growth. Money-stock elasticity of GDP has been positive and statistically significant. There are long-run and unique co-integrated relations of GDP with productivity of capital and financial depth in the 20th century. The financial crash of Black Monday in 1987 upset equilibrium relations and led to a negative money-stock elasticity of economic growth.