Chaos and Complexity in the Cumulative Effect of Financial Innovation

The centrality of finance in an economy and its importance raises the importance of financial innovation. Financial innovation plays a crucial role in economic development. Based on the understanding of the importance of financial innovation and analysis of the complexity of a financial system and the chaotic features of its evolution, we focus upon how chaotic rules impact on financial innovation in the perspective of chaotic economic theory. We set up a chaotic model of the cumulative effect of financial innovation to study the factors impacting the cumulative effect of financial innovation. These include the impetus for innovation within the financial system itself, the pulling force of economic growth, regulation, and the factors that also slow down financial evolution. All of these influences are dictated by chaotic rules. Moreover we present an empirical example based upon the case of the U.S. between 1985 and 2006. We make a contribution to the financial innovation literature by examining the cumulative effect of financial innovation by using the chaos model.