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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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File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_572.pdf
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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.
Contact details of provider: Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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  1. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2007. "Financing Development: The Role of Information Costs," Economie d'Avant Garde Research Reports 14, Economie d'Avant Garde.
  2. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2006. "The influence of financial and legal institutions on firm size," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2995-3015, November.
  3. Richard Rogerson & Diego Restuccia, 2004. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," 2004 Meeting Papers 69, Society for Economic Dynamics.
  4. Ana Hidalgo & Andres Erosa, 2004. "On Capital Market Imperfections as an Origin of Low TFP and Economic Rents," 2004 Meeting Papers 16, Society for Economic Dynamics.
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  19. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  20. Harold L. Cole & Jeremy Greenwood & Juan M. Sánchez, 2012. "Why doesn’t technology flow from rich to poor countries?," Working Papers 2012-040, Federal Reserve Bank of St. Louis.
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  34. Andres Erosa & Ana Hidalgo, 2005. "On Capital Market Imperfections as a Source of Low TFP and Economic Rents," Working Papers tecipa-200, University of Toronto, Department of Economics.
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