Quantifying the Impact of Financial Development on Economic Development

47 Pages Posted: 16 Dec 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 1, 2010

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 140 to 180 percent if it could adopt the world's best practice in the financial sector. Still, this amounts to only 34 to 40 percent 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 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 1, 2010). FRB Richmond Working Paper No. 10-05. Available at SSRN: https://ssrn.com/abstract=2189556 or http://dx.doi.org/10.2139/ssrn.2189556

Jeremy Greenwood

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 (Contact Author)

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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