Unveiling the black swan of the finance‐growth Nexus: Assumptions and preliminary evidence of virtuous and unvirtuous cycles

Research output: Contribution to journalArticlepeer-review


Empirical evidence behind the nature of the finance-growth nexus and mediating drivers behind this association is well documented in the literature. However, a framework that depicts the association between credit creation, financial innovation and endogenous creation of boom-bust cycles is less evident and the gap between empirical research and theoretical development remains. Hence, this study represents a first attempt to provide a framework that could explain the switch of economic cycles from virtuous to unvirtuous and vice versa. We examine the role of financial innovation and identify its “hidden soul” defined as the rate of financial innovation (RoFIN). We study RoFIN together with other structural factors, such as monopolistic financial power concentration and financial deregulation in the creation of what we identify as the wealth trap, as a potential mediating factor behind the creation of virtuous and unvirtuous cycles. A cross-country statistical exercise using the VUC indicator on the United States, United Kingdom, and Euro area economies shows the exponential effect of the rate of financial innovation over time and provides indicative evidence in support of our framework. Finally, we report that the indicator is better able to identify the unvirtuous cycle stages than the traditionally used Credit-to-GDP ratio.
Original languageEnglish
Pages (from-to)3749-3773
Number of pages25
JournalInternational Journal of Finance and Economics
Issue number4
Early online date12 Apr 2022
Publication statusPublished - 3 Oct 2023

Bibliographical note

This is the peer reviewed version of the following article: Lauretta, E, Chaudhry, SM & Santamaria, D 2023, 'Unveiling the black swan of the finance‐growth Nexus: Assumptions and preliminary evidence of virtuous and unvirtuous cycles', International Journal of Finance and Economics, vol. 28, no. 4, pp. 3749-3773, which has been published in final form at https://doi.org/10.1002/ijfe.2617. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. This article may not be enhanced, enriched or otherwise transformed into a derivative work, without express permission from Wiley or by statutory rights under applicable legislation. Copyright notices must not be removed, obscured or modified. The article must be linked to Wiley’s version of record on Wiley Online Library and any embedding, framing or otherwise making available the article or pages thereof by third parties from platforms, services and websites other than Wiley Online Library must be prohibited.

This document is the author’s post-print version, incorporating any revisions agreed during the peer-review process. Some differences between the published version and this version may remain and you are advised to consult the published version if you wish to cite from it.


  • business cycle
  • financial innovation
  • financial power
  • financial system
  • growth
  • regulatory dialectic


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