How Do Zombies Actually Die?

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Back in 2014, the Bank for International Settlements published a paper which argued that the financial sector crowds out real economic growth, pointing to a negative relationship between its growth and productivity gains, the Financial Times reported in a commentary. Finance’s relationship with productivity has been highlighted elsewhere, as in the work of Christiane Kneer at the Bank of England, whose findings show that financial liberalisation decreases labour productivity and total factor productivity in industries which rely strongly on skilled labour (sometimes referred to as a “brain drain” effect). Claudio Borio, head of the monetary and economic department at the BIS, returned to the theme this week. He reiterates the causal relationship between finance and productivity, claiming “that the resource misallocations induced by large financial expansions and contractions (financial cycles) can cause material and long-lasting damage to productivity growth”. Read more. (Subscription required.)