The Equilibrium Size of the Financial Sector
35 Pages Posted: 3 Nov 2008
Date Written: August 2007
Over the past 60 years, the value added of the U.S. financial sector has grown from 2.3%to 7.7% of GDP. I present a model of the equilibrium size of this industry and I studythe factors that might explain its evolution. According to the model, a shift in the jointdistribution of cash flows and investment opportunities across U.S. firms has increasedthe demand for financial services. Improvements in the relative efficiency of the finance industry also play a role. Without these improvements, a much larger fraction of firms would be financially constrained today.
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