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Quantifying the Impact of Financial Development on Economic Development

Author

Listed:
  • Jeremy Greenwood

    (University of Pennsylvania)

  • Juan Sanchez

    (Federal Reserve Bank of St. Louis)

  • Cheng Wang

    (Iowa State University)

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 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 world's best practice in the financial sector. Still, this amounts to only 29 percent of the gap between Uganda's potential and actual output. (Copyright: Elsevier)

Suggested Citation

  • Jeremy Greenwood & Juan Sanchez & Cheng Wang, 2013. "Quantifying the Impact of Financial Development on Economic Development," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 194-215, January.
  • Handle: RePEc:red:issued:11-48
    DOI: 10.1010/j.red.2012.07.003
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    More about this item

    Keywords

    Costly state verification; Economic development; Financial intermediation; Firm-size distributions; Interest-rate spreads; Cross-country output differences; Cross-country differences in financial sector productivity; Cross-country TFP differences;

    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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