Quantifying the Impact of Financial Development on Economic Development

REVIEW OF ECONOMICS DYNAMICS: MISALLOCATION AND PRODUCTIVITY, Diego Restuccia and Richard Rogerson, eds., Forthcoming

Economie d’avant garde, Research Report No. 17

49 Pages Posted: 16 Feb 2010 Last revised: 26 Mar 2012

See all articles by Jeremy Greenwood

Jeremy Greenwood

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Juan M. Sánchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Cheng Wang

University of Iowa

Multiple version iconThere are 4 versions of this paper

Date Written: April 2012

Abstract

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 116% if it could adopt the world's best practice in the financial sector. Still, this amounts to only 29% of the gap between Uganda's potential and actual output.

Keywords: costly state verification, economic development, financial intermediation, firm-size distribution, interest-rate spreads, cross-country output differences, cross-country differences in financial sector productivity, cross-country TFP differences

JEL Classification: E13, O11, O16

Suggested Citation

Greenwood, Jeremy and Sanchez, Juan M. and Wang, Cheng, Quantifying the Impact of Financial Development on Economic Development (April 2012). REVIEW OF ECONOMICS DYNAMICS: MISALLOCATION AND PRODUCTIVITY, Diego Restuccia and Richard Rogerson, eds., Forthcoming; Economie d’avant garde, Research Report No. 17. Available at SSRN: https://ssrn.com/abstract=1552131

Jeremy Greenwood (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1505 (Phone)

HOME PAGE: http://jeremygreenwood.net

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Juan M. Sanchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Cheng Wang

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

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