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Quantifying the Impact of Financial Development on Economic Development

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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 intermediation spreads and the firm-size distribution for the years 1974 and 2004. It is then used to study the international data, using cross-country interest-rate spreads and per-capita GDP. The analysis suggests a country like Uganda could increase its output by 116% if it could adopt the world's best practice in the financial sector. Still, this amounts to only 29% of the gap between Uganda's potential and actual output. Review of Economics Dynamics, forthcoming, special issue on "Misallocation and Productivity," edited by Diego Restuccia and Richard Rogerson.

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Bibliographic Info

Paper provided by Economie d'Avant Garde in its series Economie d'Avant Garde Research Reports with number 17.

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Length: 45 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:eag:rereps:17

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Web page: http://www.jeremygreenwood.net/EAG.htm

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Keywords: costly state verification; economic development; financial intermediation; firm-size distribution; interest-rate spreads; cross-country output differences; cross-country differences in financial sector productivity; cross-country TFP differences;

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Citations

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Cited by:
  1. repec:fip:fedreq:y:2011:i:3q:p:329-357:n:vol.97no.3 is not listed on IDEAS
  2. Ashantha Ranasinghe, 2012. "Property Rights, Extortion and the Misallocation of Talent," 2012 Meeting Papers 293, Society for Economic Dynamics.
  3. Jonathan Chiu & Cesaire Meh & Randall Wright, 2013. "Innovation and growth with financial, and other, frictions," CQER Working Paper 2013-01, Federal Reserve Bank of Atlanta.
  4. Harold L. Cole & Jeremy Greenwood & Juan M. Sánchez, 2012. "Why doesn’t technology flow from rich to poor countries?," Working Papers 2012-040, Federal Reserve Bank of St. Louis.
  5. 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.
  6. 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.
  7. 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.
  8. Shah, Ajay & Patnaik, Ila, 2011. "Reforming the Indian financial system," Working Papers 11/80, National Institute of Public Finance and Policy.
  9. 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.
  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. 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.
  12. Diego Restuccia, 2011. "Recent developments in economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 329-357.

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