Code and data files for "Quantifying the Impact of Financial Development on Economic Development"

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Code and data files for "Quantifying the Impact of Financial Development on Economic Development"

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Code and data files for "Quantifying the Impact of Financial Development on Economic Development"

Jeremy Greenwood, Juan M. Sánchez, Cheng Wang

01 Jan 2012-Research Papers in Economics (Review of Economic Dynamics)-

TL;DR: In this article, a costly state verification model of financial intermediation is presented to address the question of how important financial development for economic development, and the model is calibrated to match facts about the U.S. economy, such as the intermediation spreads and the firm-size distributions for 1974 and 2004.

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Abstract: 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 the intermediation spreads and the …firm-size distributions for 1974 and 2004. It is then used to study the international data using cross-country interest-rate spreads and per-capita GDPs. The analysis suggests a country like Uganda could increase its output by 116 percent if it could adopt the world’s best practice in the financial sector. Still, this amounts to only 29 percent of the gap between Uganda’s potential and actual output.

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Journal Article•DOI•

Finance and Development: A Tale of Two Sectors †

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Francisco J. Buera¹, Joseph P. Kaboski, Yongseok Shin²•Institutions (2)

University of California, Los Angeles¹, Federal Reserve Bank of St. Louis²

01 Aug 2011-The American Economic Review

TL;DR: This article developed a model co-determining aggregate total factor productivity (TFP), sectoral TFP, and scales across industrial sectors and found that financial frictions disproportionately affect TFP in tradable sectors where production requires larger costs.

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Abstract: Explaining levels of economic development hinges on explaining TFP dierences across coun- tries. In poor countries, total factor productivity (TFP) is particularly low in sectors producing tradable goods. We document that an important dierence between tradable and non-tradable sectors is their average establishment size: Tradable establishments operate at much larger scales. We develop a model co-determining aggregate TFP, sectoral TFP, and scales across industrial sectors. In our model, …nancial frictions disproportionately aect TFP in tradable sectors where production requires larger …xed costs. Our quantitative exercises show that …- nancial frictions explain a substantial part of the observed cross-country relationship between aggregate TFP, sectoral TFP, and output per worker.

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884 citations

Journal Article•DOI•

Finance and Misallocation: Evidence from Plant-Level Data

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Virgiliu Midrigan¹, Daniel Yi Xu²•Institutions (2)

New York University¹, Duke University²

01 Feb 2014-The American Economic Review

TL;DR: In this article, the role of financial frictions in determining total factor productivity (TFP) was evaluated using producer-level data, and a model of establishment dynamics was proposed to reduce TFP through two channels: finance frictions distort entry and technology adoption decisions.

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Abstract: We use producer-level data to evaluate the role of financial frictions in determining total factor productivity (TFP). We study a model of establishment dynamics in which financial frictions reduce TFP through two channels. First, finance frictions distort entry and technology adoption decisions. Second, finance frictions generate dispersion in the returns to capital across existing producers and thus productivity losses from misallocation. Parameterizations of our model consistent with the data imply fairly small losses from misallocation, but potentially sizable losses from inefficiently low levels of entry and technology adoption. (JEL E32, E44, F41, G32, L60, O33, O47)

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874 citations

Cites background from "Code and data files for "Quantifyin..."

...as well as (iii) producer and worker optimization, (iv) the no-arbitrage condition (15), and (v) the laws of motion for the measures in (17) and (18)....
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...The law of motion (17) simply adds up producers in the modern sector and those producers in the traditional sector that decide to switch....
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Journal Article•DOI•

The Causes and Costs of Misallocation

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Diego Restuccia¹, Richard Rogerson²•Institutions (2)

University of Toronto¹, Princeton University²

18 May 2017-Journal of Economic Perspectives

TL;DR: In this paper, the authors provide a perspective on three key questions: how important is misallocation, what are the causes of misallocating, and beyond the direct cost of lower contemporaneous output, are there additional costs associated with misallocations.

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Abstract: Why do living standards differ so much across countries? A consensus in the development literature is that differences in productivity are a dominant source of these differences. But what accounts for productivity differences across countries? One explanation is that frontier technologies and best practice methods are slow to diffuse to low-income countries. The recent literature on misallocation offers a distinct but complementary explanation: low-income countries are not as effective in allocating their factors of production to their most efficient use. We provide our perspective on three key questions. First, how important is misallocation? Second, what are the causes of misallocation? And third, beyond the direct cost of lower contemporaneous output, are there additional costs associated with misallocation? A summary of our answers is as follows: Misallocation appears to be a substantial channel in accounting for productivity differences across countries, but the measured magnitude of the eff...

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290 citations

Cites background from "Code and data files for "Quantifyin..."

...For example, Midrigan and Xu (2014) find that the magnitude of this effect is no more than about 10 percent (see also Buera et al. 2011; Greenwood et al. 2013; Moll 2014)....
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Posted Content•

Has the U.S. Finance Industry Become Less Efficient

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Thomas Philippon¹, Thomas Philippon²•Institutions (2)

National Bureau of Economic Research¹, New York University²

13 Dec 2011-Social Science Research Network

TL;DR: In this article, the authors use the neoclassical growth model to study financial intermediation in the U.S. over the past 140 years and find that the finance industry has become less efficient: the unit cost of intermediation is higher today than it was a century ago.

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Abstract: I use the neoclassical growth model to study financial intermediation in the U.S. over the past 140 years. I measure the cost of intermediation on the one hand, and the production of assets and liquidity services on the other. Surprisingly, the model suggests that the finance industry has become less efficient: the unit cost of intermediation is higher today than it was a century ago. Improvements in information technology seem to have been cancelled out by increases in trading activities whose social value is difficult to assess.

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188 citations

Posted Content•

Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality: A Structural Framework for Policy

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Era Dabla-Norris¹, Yan Ji², D. Filiz Unsal¹, Robert M. Townsend³•Institutions (3)

International Monetary Fund¹, Hong Kong University of Science and Technology², Massachusetts Institute of Technology³

01 Jan 2015-Social Science Research Network

TL;DR: The authors developed a micro-founded general equilibrium model with heterogeneous agents to identify pertinent constraints to financial inclusion and evaluate quantitatively the policy impacts of relaxing each of these constraints separately, and in combination, on GDP and inequality.

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Abstract: We develop a micro-founded general equilibrium model with heterogeneous agents to identify pertinent constraints to financial inclusion. We evaluate quantitatively the policy impacts of relaxing each of these constraints separately, and in combination, on GDP and inequality. We focus on three dimensions of financial inclusion: access (determined by the size of participation costs), depth (determined by the size of collateral constraints resulting from limited commitment), and intermediation efficiency (determined by the size of interest rate spreads and default possibilities due to costly monitoring). We take the model to a firm-level data from the World Bank Enterprise Survey for six countries at varying degrees of economic development — three low-income countries (Uganda, Kenya, Mozambique), and three emerging market countries (Malaysia, the Philippines, and Egypt). The results suggest that alleviating different financial frictions have a differential impact across countries, with country-specific characteristics playing a central role in determining the linkages and tradeoffs between inclusion, GDP, inequality, and the distribution of gains and losses.

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89 citations

Cites background from "Code and data files for "Quantifyin..."

...A related literature has found sizeable impacts of improved financial intermediation on aggregate productivity and income (Gine and Townsend, 2004; Jeong and Townsend, 2007, 2008; Amaral and Quintin, 2010; Buera et al., 2011; Greenwood et al., 2013)....
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References

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Journal Article•DOI•

Finance and Growth: Schumpeter Might Be Right

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King, Robert G. Levine, Ross¹•Institutions (1)

University of Rochester¹

01 Aug 1993-Quarterly Journal of Economics

TL;DR: In this paper, the authors examined a cross-section of about 80 countries for the period 1960-89 and found that various measures of financial development are strongly associated with both current and later rates of economic growth.

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Abstract: Joseph Schumpeter argued in 1911 that the services provided by financial intermediaries - mobilizing savings, evaluating projects, managing risk, monitoring managers, and facilitating transactions -stimulate technological innovation and economic development. The authors present evidence that supports this view. Examining a cross-section of about 80 countries for the period 1960-89, they find that various measures of financial development are strongly associated with both current and later rates of economic growth. Each measure has shortcomings but all tell the same story: finance matters. They present three main findings, which are robust to many specification tests: The average level of financial development for 1960-89 is very strongly associated with growth for the period. Financial development precedes growth. For example, financial depth in 1960 (the ratio of broad money to GDP) is positively and significantly related to real per capita GDP growth over the next 30 years even after controlling for a variety of country-specific characteristics and policy indicators. Financial development is positively associated with both investment rate and the efficiency with which economies use capital. Much work remains to be done, but the data are consistent with Schumpeter's view that the services provided by financial intermediaries stimulate long-run growth.

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8,204 citations

"Code and data files for "Quantifyin..." refers background in this paper

...An early example of the empirical research examining the link between nancial intermediation and growth is the well-known paper by King and Levine (1993)....
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Journal Article•DOI•

Financial Intermediation and Delegated Monitoring

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Douglas W. Diamond¹•Institutions (1)

University of Chicago¹

01 Jul 1984-The Review of Economic Studies

TL;DR: In this paper, the authors developed a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders, and presented a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary.

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Abstract: This paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders. It presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary. Diversification within an intermediary serves to reduce these costs, even in a risk neutral economy. The paper presents some more general analysis of the effect of diversification on resolving incentive problems. In the environment assumed in the model, debt contracts with costly bankruptcy are shown to be optimal. The analysis has implications for the portfolio structure and capital structure of intermediaries.

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7,982 citations

Posted Content•

International Data on Educational Attainment Updates and Implications

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Robert J. Barro¹, Robert J. Barro², Jong-Wha Lee³•Institutions (3)

Harvard University¹, National Bureau of Economic Research², Korea University³

01 Sep 2000-Social Science Research Network

TL;DR: In this paper, the authors presented a data set that improves the measurement of educational attainment for a broad group of countries, and extended their previous estimates for the population over age 15 and over age 25 up to 1995 and provided projections for 2000.

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Abstract: This paper presents a data set that improves the measurement of educational attainment for a broad group of countries. We extend our previous estimates of educational attainment for the population over age 15 and over age 25 up to 1995 and provide projections for 2000. We discuss the estimation method for the measures of educational attainment and relate our estimates to alternative international measures of human capital stocks.

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3,763 citations

Book•DOI•

Governance matters VII : aggregate and individual governance indicators 1996-2007

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Daniel Kaufmann¹, Aart Kraay², Massimo Mastruzzi³•Institutions (3)

Brookings Institution¹, World Bank², World Bank Institute³

01 Sep 2006-Social Science Research Network

TL;DR: The 2009 update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2008: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption as discussed by the authors.

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Abstract: This paper reports on the 2009 update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2008: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. These aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 33 different organizations. The data reflect the views on governance of public sector, private sector and NGO experts, as well as thousands of citizen and firm survey respondents worldwide. The authors also explicitly report the margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. They find that even after taking margins of error into account, the WGI permit meaningful cross-country comparisons as well as monitoring progress over time. The aggregate indicators, together with the disaggregated underlying indicators, are available at www.govindicators.org.

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3,059 citations

"Code and data files for "Quantifyin..." refers methods in this paper

...Figure 6 (relationship between ln z and some other variables): Data for the rule of law are taken from the World Banks Aggregate Governance Indicators, 1996-2008 see Kaufmann et al. (2009). Data on personal computers are obtained from the World Bank publication Information and Communications for Development 2009: Extending Reach and Increasing Impact. The numbers for the nancial development measure and the ratio of overhead costs to assets are available in the revised version of the Beck et al (2000) dataset mentioned above. Last, average years of education is based on Barro and Lee (2001)....
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...Figure 6 (relationship between ln z and some other variables): Data for the rule of law are taken from the World Banks Aggregate Governance Indicators, 1996-2008 see Kaufmann et al. (2009). Data on personal computers are obtained from the World Bank publication Information and Communications for Development 2009: Extending Reach and Increasing Impact. The numbers for the nancial development measure and the ratio of overhead costs to assets are available in the revised version of the Beck et al (2000) dataset mentioned above....
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...Figure 6 (relationship between ln z and some other variables): Data for the rule of law are taken from the World Banks Aggregate Governance Indicators, 1996-2008 see Kaufmann et al. (2009). Data on personal computers are obtained from the World Bank publication Information and Communications for Development 2009: Extending Reach and Increasing Impact....
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Book•

Financial Structure and Development

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Raymond W. Goldsmith

01 Jan 1969

2,982 citations

"Code and data files for "Quantifyin..." refers background or methods in this paper

...Gomme and Rupert (2007) estimate a capital share toward the low end of the values used in literature for the United States, 0.283. In their analysis of the role of capital for economic development, King and Levine (1994) use an upper bound on the values found in the literature, 0....
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...Goldsmiths (1969) classic book Financial Structure and Economic Development, economists have been developing theories and searching for empirical evidence connecting economic and nancial development....
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...Gomme and Rupert (2007) estimate a capital share toward the low end of the values used in literature for the United States, 0....
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