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Finance matters

  • Pedro S. Amaral
  • Erwan Quintin

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. Yet, accounting for all the observed dispersion 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 Federal Reserve Bank of Dallas in its series Center for Latin America Working Papers with number 0104.

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Date of creation: 2005
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Handle: RePEc:fip:feddcl:0104
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