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Quantifying the Impact of Financial Development on Economic Development

Author

Listed:
  • Jeremy Greenwood

    (University of Pennsylvania)

  • Juan M. Sanchez

    (Federal Reserve Bank of St. Louis)

  • Cheng Wang

    (Iowa State University)

Abstract

How important is financial development for economic development? A costly state veriÂ…cation 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 worldÂ’s best practice in the financial sector. Still, this amounts to only 29 percent of the gap between UgandaÂ’s potential and actual output.

Suggested Citation

  • Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2012. "Quantifying the Impact of Financial Development on Economic Development," RCER Working Papers 572, University of Rochester - Center for Economic Research (RCER).
    • Handle: RePEc:roc:rocher:572
    Note: Review of Economic Dynamics, forthcoming, special issue on “Misallocation and Productivity,” edited by Diego Restuccia and Richard Rogerson.
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    More about this item

    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;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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