Helsinki, the House of the Estates on 20 September 2007

On behalf of the Bank of Finland, I also would like to welcome you all in this seminar organised jointly by SUERF and the Bank of Finland. The theme of this seminar, namely "Financial Markets, Innovation and Growth" is topical.

The economists hold different opinions regarding the importance of the financial markets for innovation and growth.

Of course, the negative effects of monetary and financial disturbances on economic growth have been well recognized by both academics and practitioners, the recent market disturbances stemming from the US subprime mortgage financial crisis being the latest example of them. However, these disturbances to growth are usually thought to be temporary, and while possibly painful, of little consequences for the long-term development of the economy.

In this vein, most growth models neglect monetary factors entirely, and it is hardly an exaggeration to say that in most macro-economic econometric models used for example by the central banks for their policy simulations the long-run steady state is independent of monetary factors. The Bank of Finland's sophisticated AINO model for the Finnish economy is - for the time being - no exception in this respect.

The role of financial factors is minimized in the Real Business Cycle Model, where monetary and financial factors do not even affect short term developments, except for being a component of the random error term.

These models clearly reflect the view - held by many distinguished economists perhaps even today - that finance does not play any or in any case any significant role in economic development: the main driving forces of economic growth such as population growth and innovation are assumed to be independent of money and finance.

On the other hand there have been always economists who have stressed the importance of a well-functioning financial system for development. Let me just briefly mention some examples.

Walter Bagehot's classic work "Lombard Street" is known today best for its analysis of the neuroses, pathology, and therapy of financial markets. However, it also advanced the notion that England's financial system played a critical role in igniting the Industrial Revolution, a theme discussed also by John Hicks - from an Austrian perspective - in his book "A Theory of Economic History", published in 1969.

Even closer to the topic of this seminar are Joseph Schumpeter's thoughts on economic development, which in essence evolved at the early years of the last century. In them, the banking system has a pivotal role in identifying and funding those entrepreneurs which had the best chances of successfully implementing innovative products and production processes and equally important, leaving other entrepreneurs more or less at the mercy of the more destructive forces of competition.

I do not try to give a summary of recent literature here, and admit that my view may be biased, but I think that it is not wrong to say that in last say thirty years the balance of economists' opinion has shifted towards the latter school of thought, stressing the long-run significance of financial system. This shift has been much affected by a body of theoretical literature indicating channels through which financial system may affect economic development, as well as a body of empirical analyses demonstrating - rather convincingly I think - a positive link between the functioning of the financial system and long-term economic growth.

In the same vein, I can perhaps add that the better integration of monetary factors into the AINO model is high on the Bank of Finland's research agenda.

And of course, even though financial markets still are - rightly I think - heavily regulated in comparison to most other markets, their repression has become a policy option which is seldom selected in either developed or emerging market economy countries.

In this respect, there has been a profound change in policy thinking almost all over the world. Financial policies have changed in particular in many European countries, which restricted the functioning of financial markets and capital movements heavily still in the 1970s and even in the 1980s. This can be contrasted with the recent situation, where the formation of well-functioning European-wide financial markets is an integral part of the Lisbon strategy adopted by EU member states to transform Europe's economy to a competitive, dynamic, knowledge-based economy.

This conference covers a wide spectrum of issues related to financial markets, innovations and growth. I look forward for both the presentations and the discussions, and I am sure that they make an important contribution to our understanding of these complex and complicated issues.