Highlights :

• We propose a growth cycle accounting procedure to estimate the long-run elasticity between growth and finance.
• This procedure links long-run growth to the duration and growth rate of expansions and recessions.
• The elasticity between financial and economic growth rates is positive for a complete business cycle, even if high financial growth makes recessions more severe.
• This elasticity may turn negative if one considers the persistent effects of financial growth on the expansion of the subsequent cycle.

 Abstract :
Accompanying the great recession, a recent empirical literature casts doubt on the existence of a positive relationship between economic and financial growth pointing out the economic costs of excessive financial growth. We show however that if one considers the complete growth cycle, that is by including expansions into a growth cycle accounting procedure, the elasticity between financial and economic growth rates is positive for most financial series, even if high financial growth makes recessions more severe. This elasticity should be however adjusted downward, and may even turn negative, if one considers the persistent effects of financial growth on the expansion of the subsequent cycle. This effect can explain the pattern of economic growth observed during and after financial bubbles. 

 Keywords : Growth | Business Cycles | Finance | Financial Cycles | Bubbles

 JEL : E32, E44