Trends in Financial Innovation and Their Welfare Impact: An Overview

There is a fair amount of evidence that financial innovations are sometimes undertaken to create complexity and exploit the purchaser. Thus financial innovation does have a dark side. As far as the financial crisis that started in 2007 is concerned, securitization and subprime mortgages may have exacerbated the problem. However, financial crises have occurred in a very wide range of circumstances, where these and other innovations were not important. There is evidence that in the long run financial liberalization has been more of a problem than financial innovation. There are also many financial innovations that have had a significant positive effect. These include venture capital and leveraged buyout funds to finance businesses. In addition, financial innovation has allowed many improvements in the environment and in global health. On balance it seems likely its effects have been positive rather than negative.

Working paper no. 355