Financial innovation and financing of the economy: what theoretical links?

Abstract

Financial innovation is a subject that has gained momentum in recent years, especially with the latest financial crisis. This, following the phenomenal development of financial products resulting from this financial innovation.

Since this crisis, this subject has occupied a dominant status in the debates of the world economy given the financial instability it has caused and the perverse effects that have gone beyond the financial sector to reach the real sector, while stimulating a misery economic and social.

The finance research literature has dealt extensively with issues of financial innovation. Nevertheless, we are witnessing a lack of a proper theoretical approach addressing the effect of financial innovation on the financing of the economy. To fill this gap, it was necessary to investigate thoroughly as much as possible to be able to find this nexus, hence the interest of our present article.

To be able to grasp this relationship, we have referred to the analytical approach while resorting to theoretical contributions that relate to the functions of financial innovation. Based on the analysis of these theoretical contributions, we have observed that financial innovation has several functions, including the diversification of financial products, risk management and the minimization of the cost of financing. As it also allows the resolution of stock market imperfection problems, including information asymmetry and transaction costs. All of these functions are likely to promote the growth of sources of financing, the mobilization of savings and the improvement of stock market liquidity. Consequently, this allows the improvement of the financing of the economy.

Classification JEL :  G19, G23, G32, G51, B26, E44

Paper type:  Theoritical research