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An International Look at the Growth of Modern Finance

  • Thomas Philippon
  • Ariell Reshef

We study the rise of finance across a set of now-industrial economies. The long-run pattern of the growth of the income share of finance from the nineteenth century to current times in the United States is similar to some economies, but not all economies reach the same size and instead reach a plateau. The relationship between financial output and income is nonhomothetic and changes three times in this sample. Most of the increase in real GDP per capita from 1870 occurred while financial output and the income share of finance were smaller than their size in 1980. After 1980 the elasticity of income with respect to financial output falls significantly. We find considerable heterogeneity in the size of finance in recent times. There is no evidence for an increase in the unit cost of financial intermediation. We find that information technology and financial deregulation can help explain the increase in relative skill intensity and in relative wages in finance, while common trends, which may be related to financial globalization, also play a role.

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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 27 (2013)
Issue (Month): 2 (Spring)
Pages: 73-96

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Handle: RePEc:aea:jecper:v:27:y:2013:i:2:p:73-96
Note: DOI: 10.1257/jep.27.2.73
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  1. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  2. Jeremy Greenwood, 2007. "Financing Development: The Role of Information Costs," 2007 Meeting Papers 171, Society for Economic Dynamics.
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  8. Peter L. Rousseau & Richard Sylla, 2001. "Financial Systems, Economic Growth, and Globalization," Vanderbilt University Department of Economics Working Papers 0119, Vanderbilt University Department of Economics.
  9. Stephen Cecchetti & Enisse Kharroubi, 2012. "Reassessing the impact of finance on growth," BIS Working Papers 381, Bank for International Settlements.
  10. Thomas Philippon, 2012. "Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," NBER Working Papers 18077, National Bureau of Economic Research, Inc.
  11. Claudia Goldin & Lawrence F. Katz, 2008. "Transitions: Career and Family Life Cycles of the Educational Elite," American Economic Review, American Economic Association, vol. 98(2), pages 363-69, May.
  12. Sophie Osotimehin, 2013. "Aggregate productivity and the allocation of resources over the business cycle," Virginia Economics Online Papers 404, University of Virginia, Department of Economics.
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  14. Enrico Berkes & Ugo Panizza & Jean-Louis Arcand, 2012. "Too Much Finance?," IMF Working Papers 12/161, International Monetary Fund.
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