Thread by @bilyanakpetrova

Happy to see this paper with @thoatley published in Socio-Economic Review. Building on the literature on the exorbitant privilege, we explore the drivers of American #financialization. The US financial sector almost doubled in size between 1980 and 2005. 1/n

Few other industrial democracies witnessed a similar increase in the value added by finance. Financial intermediation did not rise everywhere. Rather, it shrank in some countries, grew moderately in others, and expanded significantly in CA, AUL, IRL, the UK, & the US. 2/n

Interestingly, this growth does not appear to be due to internal financial #deregulation. Relative to other countries, the US deregulated little bn 1980 and 2017. Yet, it experienced one of the largest increases in the size of its financial sector. What explains this puzzle? 3/n

In line with a growing literature that recognizes spatial interdependencies, anticipates distinct patterns of specialization, and discusses the global reorganization of finance, we link the expansion of fin services in the USA to fin liberalization in the rest of the world. 4/n

Fin liberalization removed many of the barriers that required fin transactions to occur within a compact geographic area, enabling fin institutions, non-fin corporations & households to conduct fin transactions over a larger area that no longer conformed to national borders. 5/n

Fin institutions reacted to this new environment by reorganizing their activity. The volume of cross-border capital flows rose significantly, reaching ~40% of global GDP by 2005. Further, fin institutions centralized fin activity globally to capture external economies. 6/n

The US fin services industry was especially likely to expand as a consequence of this global reorganization because of the US dollar’s global role. The dollar is the most heavily traded currency in foreign exchange markets. It underpins the global banking system. 7/n

The dollar’s role as a reserve and transactional currency encourages private and public entities from across the world to pool liquidity in the US money market. The large global banks that emerged from industry consolidation sharply intensified their dollar-based activities. 8/n

In sum, firms responded to national deregulation by centralizing their activities. The US dollar’s established role as the world’s reserve currency made the US system a preferred location for a growing share of this new financial activity. 9/n

Our empirical analysis supports this argument. Global fin deregulation and global capital account liberalization emerge as statistically significant predictors of US value added by finance. 10/n

In contrast, they do not appear to drive financial sector growth in other post-industrial democracies, suggesting that internal dynamics might be more relevant there. 11/n

We thank @whinecough, @Menninga, @JanaGrittersova, @m2matthijs, Herman Schwartz, Heather Ba and a number of anonymous reviewers for comments that greatly improved the manuscript.