Keywords: Cost of financial intermediation, economic growth, banks, financial development
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.
Full paper (2682 KB PDF)
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Last update: August 26, 1999