Analytical Political Economy

8FINANCIALIZATION AND INVESTMENT: A SURVEY OF THE EMPIRICAL LITERATURE

Leila E. Davis

Middlebury CollegeEconomics

1. Introduction

The 2008 financial crisis, beginning in the USA and spreading globally, drew the financial systems of advanced economies to the forefront of public awareness, and led to a surge of research on the size and role of the financial sectors of advanced economies. Importantly, however, this surge of attention comes on the coattails of a secular expansion in finance – across countries and by a range of measures – since the 1970s. In the USA, for which the most detailed data are available, financial sector growth is evident as a share of GDP, employment, total profits or outstanding financial assets (Krippner, 2005; Greenwood and Scharfstein, 2013; Montecino et al., 2016). Similar trends occurred outside the USA as well: Philippon and Reshef (2013) document growth in the income share of finance across a set of developed economies (the UK, the Netherlands, the USA, Japan and Canada), and Jordà et al. (2016) measure an international expansion in private credit relative to income in the second half of the twentieth century.

This growth in the size and scope of modern finance is increasingly summarized as financialization. Broadly, financialization is perhaps most commonly defined as the ‘increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies’ (Epstein, 2005, ...