Quantifying the Impact of Financial Development on Economic Development

Jeremy Greenwood
Juan M. Sanchez
Cheng Wang
Publication Type: 
Working Papers
Journal Volume: 
FRB St. Louis Working Paper 2010-023B
Publication Year: 
2010

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. 

This paper was presented at the CFSP Savings and Financial Underpinnings of Macro Models Workshop in October 2010. The corresponding presentation and discussion are also available.

JEL Codes: 
E13, O11, O16
Region: 
United States and Canada
Region: 
Global
Country: 
USA
Country: 
Global
Topic: 
Financial Institutions
Topic: 
Economic Modeling
Topic: 
Growth