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Financial Engineering and Economic Development

Author

Listed:
  • Pedro S. Amaral
  • Dean Corbae
  • Erwan Quintin

Abstract

The vast literature on financial development focuses mostly on the causal impact of the quantity of financial intermediation on economic development and productivity. This paper, instead, focuses on the role of the financial sector in creating securities that cater to the needs of heterogeneous investors. We describe a dynamic extension of Allen and Gale (1989)?s optimal security design model in which producers can tranche the stochastic cash flows they generate at a cost. Lowering security creation costs in that environment leads to more financial investment, but it has ambiguous effects on capital formation, output, and aggregate productivity. Much of the investment boom caused by increased securitization activities can, in fact, be spent on securitization costs and intermediation rents, with little or even negative effects on development and productivity.

Suggested Citation

  • Pedro S. Amaral & Dean Corbae & Erwan Quintin, 2017. "Financial Engineering and Economic Development," Working Papers 16-29R, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwq:162901
    DOI: 10.26509/frbc-wp-201629r
    Note: First posted December 2016 with the title “A New Perspective on the Finance-Development Nexus.”
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    More about this item

    Keywords

    economic development; Endogenous security markets; financial development;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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