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Quantifying the impact of financial development on economic development

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  • Jeremy Greenwood
  • Juan M. Sánchez
  • Cheng Wang

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 140 to 180 percent if it could adopt the world?s best practice in the financial sector. Still, this amounts to only 34 to 40 percent of the gap between Uganda?s potential and actual output.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-023.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-023

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Keywords: Economic development ; Intermediation (Finance);

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References

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Citations

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Cited by:
  1. Ashantha Ranasinghe, 2012. "Property Rights, Extortion and the Misallocation of Talent," 2012 Meeting Papers 293, Society for Economic Dynamics.
  2. 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.
  3. Shah, Ajay & Patnaik, Ila, 2011. "Reforming the Indian financial system," Working Papers 11/80, National Institute of Public Finance and Policy.
  4. 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.
  5. Jonathan Chiu & Cesaire Meh & Randall Wright, 2011. "Innovation and growth with financial, and other, frictions," Working Papers 688, Federal Reserve Bank of Minneapolis.
  6. 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.
  7. 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.
  8. Emilio Espino & Juan M. Sanchez, 2010. "Risk sharing, investment, and incentives in the neoclassical growth model," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 399-416.
  9. Diego Restuccia, 2011. "Recent developments in economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 329-357.

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