Costly Financial Intermediation in Neoclassical Growth Theory

61 Pages Posted: 23 Sep 2008 Last revised: 19 Sep 2010

See all articles by Rajnish Mehra

Rajnish Mehra

Arizona State University (ASU) - W.P Carey School of Business, Department of Economics; National Bureau of Economic Research (NBER)

Facundo Piguillem

Einaudi Institute for Economics and Finance (EIEF)

Edward C. Prescott

Arizona State University (ASU) - Economics Department; National Bureau of Economic Research (NBER)

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Date Written: September 2008

Abstract

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.

Suggested Citation

Mehra, Rajnish and Piguillem, Facundo and Prescott, Edward C., Costly Financial Intermediation in Neoclassical Growth Theory (September 2008). NBER Working Paper No. w14351. Available at SSRN: https://ssrn.com/abstract=1271383

Rajnish Mehra (Contact Author)

Arizona State University (ASU) - W.P Carey School of Business, Department of Economics ( email )

Tempe, AZ 85287-3806
United States
480 965 6335 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Facundo Piguillem

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana, 62
Rome, 00187
Italy

Edward C. Prescott

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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