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Quantifying the Impact of Financial Development on Economic Development

  • Juan M. Sanchez

    (Federal Reserve Bank of St. Louis)

  • Cheng Wang

    (Iowa State University)

  • Jeremy Greenwood

    (University of Pennsylvania)

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 intermediation spreads and the firm-size distribution for the years 1974 and 2004. It is then used to study the international data, using cross-country interest-rate spreads and per-capita GDP. The analysis suggests a country like Uganda could increase its output by 140 to 180% if it could adopt the world’ best practice in the financial sector. Still, this amounts to only 34 to 40% of the gap between Uganda's potential and actual output.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 240.

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Date of creation: 2011
Date of revision:
Handle: RePEc:red:sed011:240
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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