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Finance and growth: theory and new evidence

  • Paul Harrison
  • Oren Sussman
  • Joseph Zeira

This paper describes a feedback effect between real and financial development. The paper presents a new variable, which we call the cost of financial intermediation, through which the feedback between finance and growth operates. The theoretical part of the paper describes how specialization of financial intermediaries leads to such a feedback effect. The main result of this feedback is that differences in productivity across countries are amplified by financial intermediation. The empirical part of the paper uses U.S. cross-state data from banks' income statements to measure the cost of financial intermediation and to provide evidence for the feedback effect between finance and growth.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-35.

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Date of creation: 1999
Date of revision:
Handle: RePEc:fip:fedgfe:1999-35
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  1. Acemoglu, Daron & Zilibotti, Fabrizio, 1996. "Was Prometheus Unbound by Chance? Risk, Diversification and Growth," CEPR Discussion Papers 1426, C.E.P.R. Discussion Papers.
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