Innovation and Finance: An SFC Analysis of Great Surges of Development

Levy Economics Institute, Working Papers Series No. 733

47 Pages Posted: 1 Nov 2012

See all articles by Alessandro Caiani

Alessandro Caiani

University of Pavia - Faculty of Economics

Antoine Godin

Centre d'économie de l'Université de Paris Nord (CEPN); Agence Française de Développement (AFD); Hans-Boeckler-Stiftung - Macroeconomic Policy Institute (IMK)

Stefano Lucarelli

University of Bergamo

Date Written: October 31, 2012

Abstract

Schumpeter, a century ago, argued that boom-and-bust cycles are intrinsically related to the functioning of a capitalistic economy. These cycles, inherent to the rise of innovation, are an unavoidable consequence of the way in which markets evolve and assimilate successive technological revolutions. Furthermore, Schumpeter’s analysis stressed the fundamental role played by finance in fostering innovation, in defining bank credit as the “monetary complement” of innovation. Nevertheless, we feel that the connection between innovation and firm financing has seldom been examined from a theoretical standpoint, not only by economists in general, but even within the Neo-Schumpeterian research line. Our paper aims at analyzing both the long-term structural change process triggered by innovation and the related financial dynamics inside the coherent framework provided by the stock-flow consistent (SFC) approach. The model presents a multisectoral economy composed of consumption and capital goods industries, a banking sector, and two household sectors: capitalists and wage earners. The SFC approach helps us to track the flows of funds resulting from the rise of innovators in the system. The dynamics of prices, employment, and wealth distribution among the different sectors and social groups is analyzed. Above all, the essential role of finance in fostering innovation and its interaction with the real economy is underlined.

Keywords: Schumpeter, Innovation, Stock-flow Consistent Models, Monetary Circuit

JEL Classification: E11, E32, O31

Suggested Citation

Caiani, Alessandro and Godin, Antoine and Lucarelli, Stefano, Innovation and Finance: An SFC Analysis of Great Surges of Development (October 31, 2012). Levy Economics Institute, Working Papers Series No. 733. Available at SSRN: https://ssrn.com/abstract=2169384 or http://dx.doi.org/10.2139/ssrn.2169384

Alessandro Caiani (Contact Author)

University of Pavia - Faculty of Economics ( email )

Corso Strada Nuova, 65
27100 Pavia
Italy

Antoine Godin

Centre d'économie de l'Université de Paris Nord (CEPN) ( email )

UMR7115
Université Paris-Nord
Paris XIII
France

Agence Française de Développement (AFD) ( email )

5, rue Roland Barthes
Paris Cedex 12, 75598
France

Hans-Boeckler-Stiftung - Macroeconomic Policy Institute (IMK) ( email )

Hans-Böckler-Straße 39
40476 Düsseldorf
Germany

Stefano Lucarelli

University of Bergamo ( email )

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