This paper estimates the effects of financialization on physical investment in the UK using panel data based on balance-sheets of publicly listed non-financial companies supplied by Worldscope for the period 1985-2013. We find robust evidence of an adverse effect of not only financial payments (interests and dividends) but also financial incomes on the rate of accumulation. The negative impacts of financial incomes from interests and dividends are particularly strong for the pre-crisis period. Our findings support the 'financialization thesis' that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term concerns for productivity.

In this paper we estimate the effects of financialization on physical investment in selected western European countries using panel data based on the balance-sheets of publicly listed non-financial companies (NFCs) supplied by Worldscope for the period 1995-2015. We find robust evidence of an adverse effect of both financial payments (interests and dividends) and financial incomes on investment in fixed assets by the NFCs. This finding is robust for both the pool of all Western European firms and single country estimations. The negative impacts of financial incomes are non-linear with respect to the companies' size: financial incomes crowd-out investment in large companies, and have a positive effect on the investment of only small, relatively more credit-constrained companies. Moreover, we find that a higher degree of financial development is associated with a stronger negative effect of financial incomes on companies' investment. This finding challenges the common wisdom on 'finance-growth nexus'. Our findings support the 'financialization thesis' that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term stagnation in productivity. Year: 2017No: GPERC 44 GREENWICH POLITICAL ECONOMY RESEARCH CENTRE (GPERC)2

Abstract:Monetary circuit theory is one of the most interesting attempts to formally describe the functioning of a monetary production economy as centered around the concept of flux-reflux of money. Endogenous money creation by commercial banks allows the circuit to open and firms to implement production processes. Financial markets "passively" close the circuit by intermediating savings via bond and equity issuance. Despite its natural focus on financial-real side links, the monetary circuit literature has paid relatively little attention to 'financialization' and the way it has modified real-financial dynamics. In this paper, we analyze whether the fluxreflux perspective of the circuit may be fruitfully applied to the description of the linkages between the real economy and finance in a financialized economy. We propose two interconnected circuits, one for the real economy and one for the financial one. In this context, finance can still ensure a consistent closure of the whole system, thus directly allowing the functioning of the real economy. Newly developed inside-finance interactions, however, may indirectly influence real world dynamics by easing/restricting access to credit/financial markets and give rise to boom-and-bust cycles. Our aim is twofold: modeling modern financial worlds within a MC framework and understanding how financialization could have changed realfinancial interactions.

This article provides estimations of the effects of different financial channels on physical investment in Europe using the balance sheets of publicly listed non-financial corporations (NFCs) for the period 1995–2015. The evidence suggests that both financial payments and financial income have an adverse effect on investment in fixed assets. The negative impacts of increasing financial income are non-linear with respect to company size: they crowd out investment in large companies, and have a positive effect on the investment of relatively smaller companies. Similar to the recent literature on finance-growth nexus, we find an inverted U-shaped relationship between financial development and companies’ investment. However, in contrast to the existing literature, we also find that a higher degree of financial development in the country is associated with a stronger negative effect of financial income on investment.

We propose a simple short-run Post-Keynesian model in which the key aspects of shadow banking, namely securitization and the production of structured finance instruments, are explicitly formalized. To the best of our knowledge, this is the first attempt to broaden purely real-side Post-Keynesian models and their traditional focus on shareholder-value orientation, the financialization of non-financial firms, and the profit-led vs. wage-led dichotomy. We rather put emphasis on the role of financial institutions and rentier-friendly environment in determining the predominance of specific growth and distribution regimes. First, we illustrate the macroeconomic rationale of shadow banking practices. We show how, before the 2007–08 crisis, securitization and shadow banking allowed for an increase in profitability for the whole financial sector, while apparently keeping leverage under control. Second, we define a variety of shadow-banking-led regimes in terms of economic activity, productive capital accumulation, and income distribution.