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Finance Matters

  • Pedro S. Amaral

    (Southern Methodist University)

  • Erwan Quintin

    (Federal Reserve Bank of Dallas)

We present a model in which the importance of financial intermediation for development can be measured. We generate financial differences by varying the degree to which contracts can be enforced. Economies where enforcement is poor employ less capital and less efficient technologies. Calibrated simulations reveal that both effects are important. Yet, accounting for all the observed dispersion in output requires a higher capital share or a lower elasticity of substitution between capital and labor than usually assumed. We find that the effects of changes in those technological parameters on output are markedly larger when financial frictions are present. Finance, that is, matters.

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Paper provided by EconWPA in its series Macroeconomics with number 0502007.

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Length: 37 pages
Date of creation: 01 Feb 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0502007
Note: Type of Document - pdf; pages: 37
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