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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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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.27.2.73
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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. Mark Bils & Mark Aguiar, 2010. "Has Consumption Inequality Mirrored Income Inequality?," 2010 Meeting Papers 1334, Society for Economic Dynamics.
  2. Boustanifar, Hamid & Grant, Everett & Reshef, Ariell, 2016. "Wages and human capital in finance: international evidence, 1970-2005," Globalization and Monetary Policy Institute Working Paper 266, Federal Reserve Bank of Dallas.
  3. 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.
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  11. Philippon, Thomas, 2014. "Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," CEPR Discussion Papers 9792, C.E.P.R. Discussion Papers.
  12. Jean Arcand & Enrico Berkes & Ugo Panizza, 2015. "Too much finance?," Journal of Economic Growth, Springer, vol. 20(2), pages 105-148, June.
  13. Paul Oyer, 2008. "The Making of an Investment Banker: Stock Market Shocks, Career Choice, and Lifetime Income," Journal of Finance, American Finance Association, vol. 63(6), pages 2601-2628, December.
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  16. Stephen Cecchetti & Enisse Kharroubi, 2012. "Reassessing the impact of finance on growth," BIS Working Papers 381, Bank for International Settlements.
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