Working Paper: NBER ID: w15893
Authors: Jeremy Greenwood; Juan M. Sanchez; Cheng Wang
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% if it could adopt the world's best practice in the financial sector. Still, this amounts to only 34 to 40% of the gap between Uganda's potential and actual output.
Keywords: financial development; economic development; intermediation; GDP; cross-country analysis
JEL Codes: E13; O11; O16; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial development (O16) | economic development (O29) |
| financial development (O16) | growth in income (O49) |
| financial development (O16) | growth in productivity (O49) |
| improved financial intermediation (O16) | higher economic output (O49) |
| financial intermediation (G20) | U.S. growth (O51) |
| financial intermediation (G20) | Taiwan growth (O49) |
| capital-deepening effect (E22) | economic growth (O49) |
| reallocation effect (F16) | economic growth (O49) |