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Quantifying the Impact of Financial Development on Economic Development

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  • Jeremy Greenwood

    (University of Pennsylvania)

  • Juan Sanchez

    (Federal Reserve Bank of St. Louis)

  • Cheng Wang

    (Iowa State University)

Abstract

How important is financial development for economic development? A costly state verification model of financial intermediation is presented to address this question. The model is calibrated to match facts about the U.S. economy, such as the intermediation spreads and the firm-size distributions for 1974 and 2004. It is then used to study the international data using cross-country interest-rate spreads and per-capita GDPs. The analysis suggests a country like Uganda could increase its output by 116 percent if it could adopt the world's best practice in the financial sector. Still, this amounts to only 29 percent of the gap between Uganda's potential and actual output. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 16 (2013)
Issue (Month): 1 (January)
Pages: 194-215

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Handle: RePEc:red:issued:11-48

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Keywords: Costly state verification; Economic development; Financial intermediation; Firm-size distributions; Interest-rate spreads; Cross-country output differences; Cross-country differences in financial sector productivity; Cross-country TFP differences;

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References

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Citations

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Cited by:
  1. Jonathan Chiu & Cesaire Meh & Randall Wright, 2011. "Innovation and growth with financial, and other, frictions," Working Papers 688, Federal Reserve Bank of Minneapolis.
  2. Cândida Ferreira, 2013. "Bank performance and economic growth: evidence from Granger panel causality estimations," Working Papers Department of Economics 2013/21, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  3. Shah, Ajay & Patnaik, Ila, 2011. "Reforming the Indian financial system," Working Papers 11/80, National Institute of Public Finance and Policy.
  4. Pasali, Selahattin Selsah, 2013. "Where is the cheese ? synthesizing a giant literature on causes and consequences of financial sector development," Policy Research Working Paper Series 6655, The World Bank.
  5. Diego Restuccia, 2011. "Recent developments in economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 329-357.
  6. Lu, Shu-Shiuan, 2013. "The role of capital market efficiency in long-term growth: A quantitative exploration," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 161-174.
  7. Juan Sanchez & Jeremy Greenwood & Harold Cole, 2012. "Why Doesn't Technology Flow from Rich to Poor Countries?," 2012 Meeting Papers 834, Society for Economic Dynamics.
  8. repec:fip:fedreq:y:2011:i:3q:p:329-357:n:vol.97no.3 is not listed on IDEAS
  9. Egon Zakrajsek & Simon Gilchrist, 2011. "Misallocation Losses Owing to Financial Distortions: Direct Evidence From Dispersion in Borrowing Costs," 2011 Meeting Papers 1390, Society for Economic Dynamics.
  10. Bernardo Morais, 2011. "Should I Stay or Should I Go: Investor Protection, Firm Selection and Aggregate Productivity," 2011 Meeting Papers 878, Society for Economic Dynamics.
  11. Ahrang Lee, 2013. "Welfare Losses from Financial Frictions: The Role of Fixed Costs," 2013 Meeting Papers 1359, Society for Economic Dynamics.
  12. Ashantha Ranasinghe, 2012. "Property Rights, Extortion and the Misallocation of Talent," 2012 Meeting Papers 293, Society for Economic Dynamics.
  13. Rodolfo E. Manuelli & Adrian Peralta-Alva, 2011. ""Frictions in financial and labor markets": a summary of the 35th Annual Economic Policy Conference," Review, Federal Reserve Bank of St. Louis, issue July, pages 273-292.

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