The Equilibrium Size of the Financial Sector
New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)
NYU Working Paper No. FIN-07-007
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.
Number of Pages in PDF File: 35
Date posted: November 3, 2008