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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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Citations

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Cited by:
  1. 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.
  2. Jonathan Chiu & Césaire Meh & Randall Wright, 2011. "Innovation and Growth with Financial, and Other, Frictions," Working Papers 11-25, Bank of Canada.
  3. 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.
  4. Ashantha Ranasinghe, 2012. "Property Rights, Extortion and the Misallocation of Talent," 2012 Meeting Papers 293, Society for Economic Dynamics.
  5. 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.
  6. Ahrang Lee, 2013. "Welfare Losses from Financial Frictions: The Role of Fixed Costs," 2013 Meeting Papers 1359, Society for Economic Dynamics.
  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. 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.
  9. Diego Restuccia, 2011. "Recent developments in economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 329-357.
  10. Shah, Ajay & Patnaik, Ila, 2011. "Reforming the Indian financial system," Working Papers 11/80, National Institute of Public Finance and Policy.
  11. repec:fip:fedreq:y:2011:i:3q:p:329-357:n:vol.97no.3 is not listed on IDEAS
  12. 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.
  13. 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.

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