The finance and growth nexus revisited: a truly Schumpeterian perspective.

This article critically examines the widely studied nexus between the financial system and economic development, focusing on the interpretation of Joseph A. Schumpeter’s theoretical framework. It argues that mainstream finance-growth literature misinterprets Schumpeter by adopting a "real analysis" paradigm that treats banks as mere intermediaries of savings, whereas Schumpeter’s "monetary analysis" views banks as producers of purchasing power through credit creation. Using a panel dataset of 43 countries from 1940 to 2019, the authors empirically demonstrate that dynamic credit growth variables better explain the finance-growth relationship than static credit levels, and that household saving does not significantly influence GDP growth. The study also finds evidence of a bi-directional relationship between credit growth and GDP growth, including instances of negative effects of credit on growth, which aligns with Schumpeter’s view that credit can finance both productive and unproductive investments. These findings challenge the prevailing macroeconomic literature based on real analysis and suggest that a monetary perspective is essential for understanding the complex role of finance in economic growth.