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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14351.

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Date of creation: Sep 2008
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Publication status: published as Rajnish Mehra & Facundo Piguillem & Edward C. Prescott, 2011. "Costly financial intermediation in neoclassical growth theory," Quantitative Economics, Econometric Society, vol. 2(1), pages 1-36, 03.
Handle: RePEc:nbr:nberwo:14351
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