Journal of Economic Perspectives: Vol. 27 No. 2 (Spring 2013)


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An International Look at the Growth of Modern Finance

Article Citation

Philippon, Thomas, and Ariell Reshef. 2013. "An International Look at the Growth of Modern Finance." Journal of Economic Perspectives, 27(2): 73-96.

DOI: 10.1257/jep.27.2.73


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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Philippon, Thomas (NYU)
Reshef, Ariell (U VA)

JEL Classifications

E23: Macroeconomics: Production
E44: Financial Markets and the Macroeconomy
G10: General Financial Markets: General (includes Measurement and Data)
G20: Financial Institutions and Services: General


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