A NOVEL APPROACH TO THE FINANCIALIZATION OF REAL SECTOR

Abstract

Purpose- Finance is a very important sector both for real sector, economic growth and development, and as a potential source of instability. The relatively new term of financialization is used to denote the increasing role of finance in the economy. In this context, our main purpose is to make a novel contribution to the explanation of the financialization of the real sector. Literature points out the profitability problem of real sector in the crisis of 1970s and ensuing political, legal and institutional changes described as neo-liberalism. Hence, we investigate the relationship between profit rate and financialization of real sector and we argue a long-term relationship between them that goes beyond the crisis of 1970s. Methodology- We constructed profit rate series and financialization series starting from 1948 for real sector in the USA, because it is the country providing the longest and most detailed data. Since the series are integrated of different orders, the ARDL Bounds Test approach is used to test the long-term relationship between profit rate and ratio of financial assets in total assets as a measure of financialization. Findings- The results indicate that there is a long-term relationship between financialization and profit rate. Also, the relationship is negative. Thus, profit rate decreases are related to increased ratio of financial assets in total assets in long-term. Conclusion- Our results imply that confronting profitability problem real sector directs its sources to finance. Despite the common view in the literature that this relation has started around 1970s, our analysis indicate that this relationship goes beyond the changes that took place in 1970s or 1980s which are considered as leading to neoliberalism.

Keywords

• Financialization
• profit rate
• real sector
• political economy
• Bounds test

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