Slow-Moving Traps

This paper studies the link between productivity and technological change in both the real and financial sectors and its effect on growth. The financial system affects technological change in the real sector by providing the funds that firms in the real sector need to implement more advanced technologies. In turn, the widespread use of advanced technologies in the real sector facilitates technological innovation in the financial sector, reducing financial intermediation costs. Thus, technological change in both sectors is mutually reinforcing and may generate multiple balanced growth paths with different financial intermediation costs, interest spreads and technological gaps.