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Financial Innovations, Taxes, and the Growth of Finance

Author

Listed:
  • Shuhei Aoki

    (Shinshu University)

  • Makoto Nirei

    (University of Tokyo)

  • Kazufumi Yamana

    (Deloitte Tohmatsu Consulting LLC)

Abstract

The U.S. economy since 1980 has experienced the growth of finance, manifested by the increases in the value-added of financial services and the value of financial assets. The growth of finance has been associated with the increase in the mutual fund share in the financial assets and the relatively stable unit cost of finance. This paper constructs an incomplete market dynamic general equilibrium model with the islands structure, which has both idiosyncratic and island-level shocks on the firm’s productivity. Financial intermediaries trade shares of individual firms and risk-free debts, as well as mutual funds which diversify away idiosyncratic shocks but can not diversify island-level shocks. This model, together with the declining transaction costs on mutual funds and personal and corporate income tax rates calibrated from data, can quantitatively account for these facts.

Suggested Citation

  • Shuhei Aoki & Makoto Nirei & Kazufumi Yamana, 2023. "Financial Innovations, Taxes, and the Growth of Finance," CARF F-Series CARF-F-574, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf574
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    References listed on IDEAS

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    1. SeHyoun Ahn & Greg Kaplan & Benjamin Moll & Thomas Winberry & Christian Wolf, 2018. "When Inequality Matters for Macro and Macro Matters for Inequality," NBER Macroeconomics Annual, University of Chicago Press, vol. 32(1), pages 1-75.
    2. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    3. Shuhei Aoki & Makoto Nirei, 2016. "Pareto Distribution of Income in Neoclassical Growth Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 25-42, April.
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