Financial Intermediation and Structural Change: Theory and Evidence

David Jones, Corrado Di Maria and Simone Valente
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David Jones: University of East Anglia

No 2021-06, University of East Anglia School of Economics Working Paper Series from School of Economics, University of East Anglia, Norwich, UK.

Abstract: Does financial intermediation affect structural change? We investigate both theoretically and empirically whether financial development accelerates structural change during the post-industrialization phase where employment, value-added and expenditure shares change towards services and away from manufacturing. We build a dynamic general equilibrium model where firms and households face different types of intermediation costs, and structural change can be driven by mutually independent technology differences { exogenous productivity gaps or asymmetric factor elasticities { as well as by learning-by-doing. Besides suggesting a stronger impact of financial development when productivity is endogenous and services are labor-intensive, all the model specifications robustly predict that exogenous reductions in intermediation costs { e.g., deregulation shocks { accelerate the pace and extent of structural change. We test this prediction empirically by examining the effects of state by- state bank branching deregulation in the United States in the 1970-1990s period. Using a range of estimation techniques including synthetic control methods { pooled, augmented, and with staggered treatment { we show that bank branching deregulation accelerated the structural change that was already underway, i.e., services account for a greater share of output and employment than they would have in the absence of deregulation.

Keywords: Economic growth; structural change; nancial development; banking deregulation (search for similar items in EconPapers)
JEL-codes: G28 O14 O16 O41 O47 (search for similar items in EconPapers)
Date: 2021-07-29
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg and nep-isf
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