This paper examines how the absorption of talent into the financial sector affects the real sectors in the economy. Based on a sample of 13 countries observed over the period 1980-2005, I show that financial liberalization is associated with skillupgrading in the financial sector. I exploit variation in financial liberalization across countries and time, and differences in the needs for skilled labour across manufacturing industries to identify the effect of the absorption of talent into finance on real sector outcomes. My evidence suggests that employment of skilled individuals grows disproportionally slower in skill-intensive relative to less skill-intensive industries following financial reform. I also show that financial liberalization decreases labour productivity, total factor productivity and value added growth disproportionally in industries which rely strongly on skilled labour. This is consistent with the idea that financial liberalization hurts non-financial sectors via a brain-drain effect. Among the different dimensions of financial liberalization, especially policies fostering the development of security markets account for this finding. 1

The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. Working Paper 2014-23

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I provide a quantitative interpretation of financial intermediation in the U.S. over the past 130 years. Measuring separately the cost of intermediation and the production of financial services, I find that: (i) the quantity of intermediation varies a lot over time; (ii) intermediation is produced under constant returns to scale; (iii) the annual cost of intermediation is around 2 % of outstanding assets; (iv) adjustments for borrowers ’ quality are quantitatively important; and (v) the unit cost of intermediation has increased over the past 30 years.

This paper does not necessarily reflect the views of the World Bank, its Executive Diectors or the countries they represent.

The views expressed herein are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco, the Board of Governors of the Federal Reserve System, or the National Bureau of Economic Research. We are particularly grateful to a large number of researchers at universities and central banks around the world who helped with the construction of the historical dataset. Details can be found in the appendix. We wish to thank Philip Jung, Atif Mian and Gernot Mueller for helpful comments and Katharina Knoll for sharing data on home ownership rates and housing wealth. The authors gratefully acknowledge financial support from the Institute for New Economic Thinking (INET) administered by UC Davis. Schularick received financial support from the Volkswagen Foundation. This research was undertaken while Schularick

This paper documents the evolution of net flows of saving across sectors in six financial