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Technological Progress and Financial Stability

This article proposes that technological progress in financial intermediation can make the economy more fragile if it is not accompanied by a proportional degree of technological progress in the real sector. In the model economy discussed, firms are operated by heterogeneous managers who differ in their ability to run a successful project. Systemic risk is defined by the characteristics of the most risky firms. If financial development outpaces technological advances in the real sector, the price of financial services decreases, allowing riskier producers to enter the market. It is concluded that commensurate rates of technological development in both the financial and real sectors are necessary for stable and balanced economic growth.