Financial Intermediation and Structural Change

Does financial intermediation affect structural change? We address this question both theoretically and empirically, focussing on whether financial development reinforces 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 in which structural change may be driven by mutually independent engines – sectoral productivity gaps, asymmetric factor elasticities – as well as by learning by doing. In all its variants, the model robustly predicts that exogenous reductions in intermediation costs – e.g., deregulation shocks – reinforce structural change. We take this prediction to the data by examining the effects of bank branching deregulation in the United States in the 1960s-1990s period. Within a staggered difference-in-differences framework, we show that bank branching deregulation reinforced the pattern of structural change already underway, leading to an increase in the services share of output and employment in deregulated states.