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PKSG Working Paper Series

Working Paper PKWP1619

Financialisation: Dimensions and determinants. A cross-country study

December 2016

Ewa Karwowski, Mimoza Shabani, Engelbert Stockhammer

The financialisation literature has grown over the past two decades. While there is a generally accepted definition, effectively financialisation has been used to describe very different phenomena. This paper proposes a multi-faceted notion of financialisation by distinguishing between financialisation of non-financial companies, households and the financial sector and using activity as well as vulnerability measures of financialisation. We identify seven financialisation hypotheses in the literature and empirically investigate them in a cross-country analysis for 17 OECD countries for the 1997-2007 period. We find that different financialisation measures are only weakly correlated, which suggests the existence of distinct financialisation processes. There is strong evidence across all sectors that financialisation is closely linked to asset price inflation and correlated with a debt-driven demand regime. Financial deregulation encourages financialisation, especially in the financial and household sector. By contrast, there is limited evidence that market-based financial systems tend to be more financialised, meaning financialisation can occur with large banks. Foreign financial inflows do not seem to be a main driver. We do not find indication that a secular investment slowdown precedes financialisation. Overall, our findings suggest that financialisation should be understood as variegated process, playing out differently across economic sectors in different countries.

Keywords: financialisation, cross country analysis, financial deregulation, property prices

JEL classification: B50: Current Heterodox Approaches: General B51: Current Heterodox Approaches: Socialist; Marxian; Sraffian G10: General Financial Markets: General (includes Measurement and Data) G20: Financial Institutions and Services: General G30: Corporate Finance and Governance: General P51: Comparative Analysis of Economic Systems

Download: Working Paper PKWP1619