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Why Has the US Financial Sector Grown So Much?


  • NYU-Stern

    (NBER, CEPR)


The share of finance in U.S. GDP has been multiplied by more than three over the post-war 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.

Suggested Citation

  • NYU-Stern, 2008. "Why Has the US Financial Sector Grown So Much?," 2008 Meeting Papers 714, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:714

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    References listed on IDEAS

    1. Eugene F. Fama & Kenneth R. French, 2001. "Disappearing Dividends: Changing Firm Characteristics Or Lower Propensity To Pay?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(1), pages 67-79.
    2. Bruno Biais & Christophe Bisiere & Jean-Paul Decamps, 2000. "A Structural Econometric Investigation of the Agency Theory of Financial Structure," Econometric Society World Congress 2000 Contributed Papers 0817, Econometric Society.
    3. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-1891, September.
    4. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, August.
    5. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
    6. Robert C. Merton, 1995. "A Functional Perspective of Financial Intermediation," Financial Management, Financial Management Association, vol. 24(2), Summer.
    7. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    8. Thomas Philippon, 2007. "Financiers vs. Engineers: Should the Financial Sector be Taxed or Subsidized?," NBER Working Papers 13560, National Bureau of Economic Research, Inc.
    9. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
    10. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, July.
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    Cited by:

    1. van den Berg, G. J & Lundborg P & Nystedt P & Rooth D, 2009. "Critical Periods During Childhood and Adolescence: A Study of Adult Height Among Immigrant Siblings," Health, Econometrics and Data Group (HEDG) Working Papers 09/20, HEDG, c/o Department of Economics, University of York.
    2. Abedifar, Pejman & Hasan, Iftekhar & Tarazi, Amine, 2016. "Finance-growth nexus and dual-banking systems: Relative importance of Islamic banks," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 198-215.
    3. Jena, Pratap Ranjan, 2017. "Indian Variant of MTEF: The Scope and Opportunities to Develop an Effective Budget Planning Process," Working Papers 17/185, National Institute of Public Finance and Policy.
    4. Chong-En Bai & Chang-Tai Hsieh & Zheng (Michael) Song, 2016. "The Long Shadow of China’s Fiscal Expansion," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 47(2 (Fall)), pages 129-181.
    5. Casu, Barbara & Girardone, Claudia, 2010. "Integration and efficiency convergence in EU banking markets," Omega, Elsevier, vol. 38(5), pages 260-267, October.
    6. repec:bin:bpeajo:v:47:y:2016:i:2016-02:p:129-181 is not listed on IDEAS
    7. Alessandro Fedele & Raffaele Miniaci, 2017. "Stakeholder Orientation and Capital Structure in the Social Care Sector," BEMPS - Bozen Economics & Management Paper Series BEMPS40, Faculty of Economics and Management at the Free University of Bozen.

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