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The Financial Crisis and the Measurement of Financial Sector Activity

  • Charles, Steindel

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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  1. Vasco Cúrdia & Michael Woodford, 2009. "Conventional and unconventional monetary policy," Staff Reports 404, Federal Reserve Bank of New York.
  2. Susanto Basu & Robert Inklaar & J. Christina Wang, 2008. "The Value of Risk: Measuring the Service Output of U.S. Commercial Banks," NBER Working Papers 14615, National Bureau of Economic Research, Inc.
  3. Carmen M. Reinhart & Vincent R. Reinhart, 2010. "After the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 17-60.
  4. repec:fip:fedgsq:y:2008:x:80 is not listed on IDEAS
  5. Furceri, Davide & Mourougane, Annabelle, 2012. "The effect of financial crises on potential output: New empirical evidence from OECD countries," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 822-832.
  6. 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, October.
  7. Carol Corrado & Charles Hulten & Daniel Sichel, 2005. "Measuring Capital and Technology: An Expanded Framework," NBER Chapters, in: Measuring Capital in the New Economy, pages 11-46 National Bureau of Economic Research, Inc.
  8. Dennis J Fixler & Marshall B Reinsdorf & Shaunda Villones, 2010. "Measuring the services of commercial banks in the NIPA," IFC Bulletins chapters, 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.
  9. J. Christina Wang & Susanto Basu & John G. Fernald, 2009. "A General-Equilibrium Asset-Pricing Approach to the Measurement of Nominal and Real Bank Output," NBER Chapters, in: Price Index Concepts and Measurement, pages 273-320 National Bureau of Economic Research, Inc.
  10. Charles Steindel, 2009. "Implications of the financial crisis for potential growth: past, present, and future," Staff Reports 408, Federal Reserve Bank of New York.
  11. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, March.
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