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Quantifying the Impact of Financial Development on Economic Development

  • Jeremy Greenwood

    (University of Pennsylvania)

  • Juan M. Sanchez

    (Federal Reserve Bank of St. Louis)

  • Cheng Wang

    (Iowa State University)

How important is financial development for economic development? A costly state veriÂ…cation model of financial intermediation is presented to address this question. The model is calibrated to match facts about the U.S. economy, such as the intermediation spreads and the firm-size distributions for 1974 and 2004. It is then used to study the international data using cross-country interest-rate spreads and per-capita GDPs. The analysis suggests a country like Uganda could increase its output by 116 percent if it could adopt the worldÂ’s best practice in the financial sector. Still, this amounts to only 29 percent of the gap between UgandaÂ’s potential and actual output.

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Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 572.

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Length: 49 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:roc:rocher:572
Note: Review of Economic Dynamics, forthcoming, special issue on “Misallocation and Productivity,” edited by Diego Restuccia and Richard Rogerson.
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University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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