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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Finance and Growth: Theory and New Evidence
Paul Harrison, Oren Sussman, and Joseph Zeira

Abstract: This paper describes a feedback effect between real and financial development. The paper presents a new variable, which we call the cost of financial intermediation, through which the feedback between finance and growth operates. The theoretical part of the paper describes how specialization of financial intermediaries leads to such a feedback effect. The main result of this feedback is that differences in productivity across countries are amplified by financial intermediation. The empirical part of the paper uses U.S. cross-state data from banks' income statements to measure the cost of financial intermediation and to provide evidence for the feedback effect between finance and growth.

Keywords: Cost of financial intermediation, economic growth, banks, financial development

Full paper (2682 KB PDF)

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Last update: August 26, 1999