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The Financial Crisis and the Measurement of Financial Sector Activity

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  • Charles, Steindel

Abstract

The widespread expectation, forcefully posed by Reinhart and Rogoff (2009), that growth in the U.S. and the rest of the industrialized world will be subpar for a prolonged period following the financial crisis, raises issues for the measurement of the financial sector’s activity. According to the U.S. NIPA, finance and insurance accounts for roughly 8 percent of GDP, much of which consists of routine processing of transactions and maintenance of accounts. As noted in Steindel (2009), by normal growth accounting reasoning, even a marked contraction in the sector’s activity would not seem likely to be capable by itself to have a major prolonged negative impact on growth. One possible alternate way to account for the activity of the sector, building on the work of Corrado, Hulten, and Sichel (2005, 2009), is that the very high levels of employee compensation in finance partly reflect investments in market knowledge, a form of intangible capital. The increased growth in such market knowledge in the years leading up to the crisis may have helped to support growth in the economy outside of finance, while its diminution in the current environment (if not offset by increased growth of comparable knowledge elsewhere) could work to hold down growth. Altering the treatment of finance in the accounts in this fashion helps to bridge, if not fully close, the gap between the absolute size of the sector as gauged in the standard way and its generally acknowledged large and persistent effect on aggregate activity.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27240.

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Date of creation: 13 Nov 2010
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Handle: RePEc:pra:mprapa:27240

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Keywords: Financial activity; multifactor productivity; growth contribution; compensation; potential growth;

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  1. Basu, Susanto & Inklaar, Robert & Wang, J. Christina, 2008. "The Value of Risk: Measuring the Service Output of U.S. Commercial Banks," GGDC Research Memorandum, Groningen Growth and Development Centre, University of Groningen GD-102, Groningen Growth and Development Centre, University of Groningen.
  2. Charles Steindel, 2009. "Implications of the financial crisis for potential growth: past, present, and future," Staff Reports, Federal Reserve Bank of New York 408, Federal Reserve Bank of New York.
  3. Carmen M. Reinhart & Vincent R. Reinhart, 2010. "After the Fall," NBER Working Papers 16334, National Bureau of Economic Research, Inc.
  4. W. Erwin Diewert & John S. Greenlees & Charles R. Hulten, 2009. "Price Index Concepts and Measurement," NBER Books, National Bureau of Economic Research, Inc, number diew08-1.
  5. Christina Wang & Susanto Basu & John G. Fernald, 2004. "A general-equilibrium asset-pricing approach to the measurement of nominal and real bank output," Working Papers, Federal Reserve Bank of Boston 04-7, Federal Reserve Bank of Boston.
  6. Carol Corrado & Charles Hulten & Daniel Sichel, 2004. "Measuring capital and technology: an expanded framework," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-65, Board of Governors of the Federal Reserve System (U.S.).
  7. Dennis J Fixler & Marshall B Reinsdorf & Shaunda Villones, 2010. "Measuring the services of commercial banks in the NIPA," IFC Bulletins chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), The IFC's contribution to the 57th ISI Session, Durban, August 2009, volume 33, pages 346-349 Bank for International Settlements.
  8. Davide Furceri & Annabelle Mourougane, 2009. "The Effect of Financial Crises on Potential Output: New Empirical Evidence from OECD Countries," OECD Economics Department Working Papers 699, OECD Publishing.
  9. Cúrdia, Vasco & Woodford, Michael, 2009. "Conventional and Unconventional Monetary Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7514, C.E.P.R. Discussion Papers.
  10. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
  11. repec:fip:fedgsq:y:2008:x:80 is not listed on IDEAS
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