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Finance Matters

Author

Listed:
  • Pedro S. Amaral

    (Southern Methodist University)

  • Erwan Quintin

    (Federal Reserve Bank of Dallas)

Abstract

We present a model in which the importance of financial intermediation for development can be measured. We generate financial differences by varying the degree to which contracts can be enforced. Economies where enforcement is poor employ less capital and less efficient technologies. Calibrated simulations reveal that both effects are important. Yet, accounting for all the observed dispersion in output requires a higher capital share or a lower elasticity of substitution between capital and labor than usually assumed. We find that the effects of changes in those technological parameters on output are markedly larger when financial frictions are present. Finance, that is, matters.

Suggested Citation

  • Pedro S. Amaral & Erwan Quintin, 2005. "Finance Matters," Macroeconomics 0502007, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0502007
    Note: Type of Document - pdf; pages: 37
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    Cited by:

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    3. Meza, Felipe & Benjamin, David, 2006. "Productivity in economies with financial frictions: facts and a theory," Discussion Paper Series In Economics And Econometrics 0613, Economics Division, School of Social Sciences, University of Southampton.
    4. Herrendorf, Berthold & Valentinyi, Akos, 2005. "What Sectors Make the Poor Countries So Unproductive?," CEPR Discussion Papers 5399, C.E.P.R. Discussion Papers.

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