Finance Matters

38 Pages Posted: 30 Aug 2005

See all articles by Pedro S. Amaral

Pedro S. Amaral

California State University, Fullerton - Department of Economics

Erwan Quintin

Federal Reserve Bank of Dallas

Date Written: March 23, 2005

Abstract

We present a model in which the importance of financial intermediation for development can be measured. We generate differences in the quantity of financial intermediation by varying the degree to which loan contracts can be enforced. Economies where contracts are poorly enforced employ less capital and operate more inefficient technologies. Calibrated numerical simulations reveal that both channels are quantitatively important. Nevertheless, under standard technological assumptions, financial disruptions alone cannot generate all the output dispersion one observes in the data. Matching that dispersion requires a higher capital share or a lower elasticity of substitution between capital and labor than usually assumed. We find that modeling financial disruptions explicitly markedly increases the effect on output variation of changes in those parameters. Finance, that is, matters.

Keywords: Development, Finance, Limited Enforcement

Suggested Citation

Amaral, Pedro S. and Quintin, Erwan, Finance Matters (March 23, 2005). Available at SSRN: https://ssrn.com/abstract=788105 or http://dx.doi.org/10.2139/ssrn.788105

Pedro S. Amaral (Contact Author)

California State University, Fullerton - Department of Economics ( email )

Fullerton, CA 92834
United States

Erwan Quintin

Federal Reserve Bank of Dallas ( email )

PO Box 655906
Dallas, TX 75265-5906
United States

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