Costly Financial Intermediation in Neoclassical Growth Theory

60 Pages Posted: 28 Mar 2011

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)

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2011

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.

Keywords: Aggregate Intermediation, Borrowing, Lending, Equity premium, Government Debt, Life Cycle Savings, Retirement

JEL Classification: D31, E2, E21,E44, G1, G11, G12, G23, H0, H62

Suggested Citation

Mehra, Rajnish and Piguillem, Facundo and Prescott, Edward C., Costly Financial Intermediation in Neoclassical Growth Theory (January 22, 2011). Available at SSRN: https://ssrn.com/abstract=1796728 or http://dx.doi.org/10.2139/ssrn.1796728

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

Register to save articles to
your library

Register

Paper statistics

Downloads
36
Abstract Views
639
PlumX Metrics