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Finance Matters

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Author Info
Pedro S. Amaral (Southern Methodist University)
Erwan Quintin (Federal Reserve Bank of Dallas)

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Abstract

We present a model in which the importance of financial intermediation for development can be measured. We generate financial differences by varying the degree to which contracts can be enforced. Economies where enforcement is poor employ less capital and less efficient technologies. Calibrated simulations reveal that both effects are important. Yet, accounting for all the observed dispersion in output requires a higher capital share or a lower elasticity of substitution between capital and labor than usually assumed. We find that the effects of changes in those technological parameters on output are markedly larger when financial frictions are present. Finance, that is, matters.

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Paper provided by EconWPA in its series Macroeconomics with number 0502007.

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Length: 37 pages
Date of creation: 01 Feb 2005
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Handle: RePEc:wpa:wuwpma:0502007

Note: Type of Document - pdf; pages: 37
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E - Macroeconomics and Monetary Economics

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Berthold Herrendorf & Akos Valentinyi, 2005. "Which Sectors Make the Poor Countries so Unproductive?," IEHAS Discussion Papers 0519, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
  2. Daron Acemoglu & Pol Antràs & Elhanan Helpman, 2007. "Contracts and Technology Adoption," American Economic Review, American Economic Association, vol. 97(3), pages 916-943, June. [Downloadable!]
  3. David Benjamin, Felipe Meza, . "Productivity in Economies with Financial Frictions: Facts and a Theory," Discussion Paper Series In Economics And Econometrics 0613, Economics Division, School of Social Sciences, University of Southampton. [Downloadable!]
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This page was last updated on 2009-11-30.

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