A project with Max Bernier, a former MSc student of mine, was recently (and very speedily) accepted at Research in Economics, after spending a long time awaiting a second reviewer at another journal. We take an aggregate approach to financial innovation, in contrast with most other research (which focuses on distinct methods of innovation), and explore macroprudential policies’ influence on both it and its effect on economic growth. While financial innovation can potentially influence economic growth through several pathways, we only find evidence that it does so through gross capital accumulation. Macroprudential policy does not affect financial innovation’s influence on gross capital accumulation, while any effects it may have on other growth pathways are specification dependent. While our results point to a relatively neutral effect of macroprudential policy on the financial innovation-economic growth nexus, policy makers should heed practical results from macroprudential policy as highlighted in other areas of research before undertaking such a route. Finally, our evidence of the financial innovation-economic growth nexus through gross capital accumulation points to a need for a functional approach to regulation: innovation encouraging capital formation should be encouraged, while other forms may benefit from increased regulatory scrutiny to avoid growth-diminishing outcomes.
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