QUANTIFYING THE IMPACT OF FINANCIAL DEVELOPMENT ON ECONOMICDEVELOPMENT

How important is financial development for economic development? A costly state verification modelof financial intermediation is presented to address this question. The model is calibrated to match factsabout the U.S. economy, such as intermediation spreads and the firm-size distribution for the years1974 and 2004. It is then used to study the international data, using cross-country interest-rate spreadsand per-capita GDP. The analysis suggests a country like Uganda could increase its output by 140to 180% if it could adopt the world's best practice in the financial sector. Still, this amounts to only34 to 40% of the gap between Uganda's potential and actual output....