The share of finance in U.S. GDP has been multiplied by more than three over the postwar 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13405.
Length: Date of creation: Sep 2007 Date of revision: Handle: RePEc:nbr:nberwo:13405
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Find related papers by JEL classification: E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment G2 - Financial Economics - - Financial Institutions and Services G3 - Financial Economics - - Corporate Finance and Governance O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
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