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Why Has the US Financial Sector Grown So Much?

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  • NYU-Stern

    (NBER, CEPR)

Abstract

The share of finance in U.S. GDP has been multiplied by more than three over the post-war period. I argue, using evidence and theory, that corporate finance is a key factor behind this evolution. Inside the finance industry, credit intermediation and corporate finance are more important than globalization, increased trading, or the development of mutual funds for explaining the trend. In the non financial sector, firms with low cash flows account for a growing share of total investment. I build a simple equilibrium model to capture these salient features and I use it to interpret the data. I find that corporate demand is the main contributor to the growth of the finance industry, but also that efficiency gains in finance have been important to limit credit rationing. Overall, the model can account for a bit more than half of the financial sector's growth.

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  • NYU-Stern, 2008. "Why Has the US Financial Sector Grown So Much?," 2008 Meeting Papers 714, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:714
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    References listed on IDEAS

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