jean - pierre danthine : financial development – can we have too much of a good thing? speech by mr jean - pierre danthine, vice chairman of the governing board of the swiss national bank, at the international conference on “ financial development, stability and growth ”, jointly organised by the state secretariat for economic affairs ( seco ) and the graduate institute of international and development studies, geneva, 25 october 2012. * * * i would like to thank claudia strub and till ebner for their valuable support in drafting this speech. introduction typically, the term “ development ” has a positive connotation. a state of higher development is perceived to be superior to a state of low development. the same is true for the term “ financial development ”, which we associate with improved financial products, processes and institutions. financial development leads to an improved allocation of capital, empowering entrepreneurs and facilitating risk bearing and consumption smoothing. all in all, financial development increases welfare and potentially promotes growth. as schumpeter saw it, “ bankers are the gatekeepers of capitalist economic development. their strategic function is to screen potential innovators and advance the necessary purchasing power to the most promising. ” 1 and, indeed, the pre - crisis economic literature on financial development was strongly influenced by king and levine ’ s empirical study2 suggesting that “ schumpeter may be right ”. using data on 80 countries over the 1960 – 89 period, the authors concluded that the cross - county evidence was consistent with the view that the financial system promotes growth. the same message is conveyed by a more intuitive interpretation of key historical episodes in which finance appears to have played a key role in increasing overall welfare. i have in mind, for instance, the financing of railway expansion in the 19th century ( an early form of syndicated loans ), the financing of high - technology firms in the 20th century ( venture capital ), or “ microfinance ”, allowing local, small - scale business initiatives in low - income countries to tap the global capital market. the recent financial crisis, however, has prompted us to review this benign assessment. today, there is broad support for the view that not all forms of financial development are favourable to economic stability, growth and welfare. more extreme views are also prevalent, such as paul volker ’ s, “ i wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy. ” how can we reconcile

for expected inflation three years ahead. i have covered a broad range of topics here today, a lot of charts – but there ’ s economists for you. as i conclude my remarks, i cannot help but put the challenges that we face today in a wider historical context, including the challenges donal nevin and others faced in the 1970s and 1980 ’ s. while historical parallels are dangerous, the one constant is that the predominate aim of public servants, past and present, is to serve the public good through analysis that best informs policy decisions. i hope what i have set out today gives a sense of the challenges faced through our own informed perspective on inflation and labour market developments and how these might inform monetary policy. i hope i have done just that, and, look forward to the discussion. thank you. 1 turlough o ’ riordan, march 2022, dictionary of irish biography. the online archives of the statistical and social inquiry society of ireland and national newspapers also contain references to donal nevin ’ s many contributions to policy issues of the day. irish independent obituary 3 fiscal frameworks have also been strengthened in ireland and across the eu, with an enhanced role for independent fiscal councils in monitoring and assessing the fiscal policy stance. 4 blanchard ( 1986 ) explains how a wage price spiral can emerge when wage and price setting is staggered. de long ’ s ( 1997 ) paper on inflation during the 1970s describes nominal wage dynamics during this period, as well as policy failures that ultimately led to the volker disinflation of the early - 1980s. 5 “ wage growth in europe : evidence from job ads ”, pawel adrjan and reamonn lydon. central bank of ireland economic letter, vol 2022, no. 7. 6 similar points have been made at the june 2022 ecb forum on central banking policy panel in sintra, and by gopinath ( 2022 ) at the recent jackson hole symposium. see “ two per cent inflation target ”, an explanatory note from the ecb. 8 these estimates, from kalemli - ozcan et al. ( 2022 ), uses data through to end - 2021, when inflation was averaging 4 - 5 % in the euro area and 6 - 7 % in the us. see hopkins and sherman ( 2021 ), byrne et al. ( 2020 ), hodbod et al. ( 2021 ) and datta et al. ( 2022 ) for a description