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Costly financial intermediation in neoclassical growth theory

  • Rajnish Mehra
  • Facundo Piguillem
  • Edward C. Prescott

The neoclassical growth model is extended to include costly intermediated borrowing and lending between households. This is an important extension as substantial resources are used in intermediating the large amount of borrowing and lending between households. In 2007, in the United States, the amount intermediated was 1.7 times GNP, and the resources used in this intermediation amounted to at least 3.4 percent of GNP. The theory implies that financial intermediation services are an intermediate good and that the spread between borrowing and lending rates measures the efficiency of the financial sector.

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Article provided by Econometric Society in its journal Quantitative Economics.

Volume (Year): 2 (2011)
Issue (Month): 1 (03)
Pages: 1-36

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Handle: RePEc:ecm:quante:v:2:y:2011:i:1:p:1-36
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