Financial intermediation, variability and the development process

Financial Intermediation, Variability and the Development Process*

Luis Carranza BBVA Banco Continental

José E Galdón-Sánchez

London School of Economics and Political Science

The Suntory Centre

Suntory and Toyota International Centres for Economics and Related Disciplines

London School of Economics and Political Science Houghton Street

DEDPS 21 London WC2A 2AE

March 2000 Tel: (020) 7955 6674

* _{We would like to thank Raouf Boucekkine, César Alonso, Juan Carlos Conesa, Jesús}

Fernandez-Villaverde, Maia Güell, Nobu Kiyotaki, and seminar participants at the University of Minnesota Macroeconomics Workshop, the Universidad Carlos III de Madrid, and XVth Latin American Meeting of the Econometric Society, Santiago de Chile, for very useful comments. José E Galdón-Sánchez thanks DGICYT (grant PB94-0378) and the Fundación Caja de Madrid for financial support. Any views expressed in this paper are those of the authors and not necessarily those of the BBVA Banco Continental. The usual disclaimers apply.

CORE Metadata, citation and similar papers at core.ac.uk

Abstract

In this paper we build a model of financial intermediation that explains the GDP variability pattern of an economy during the development process. In our model, per capita output is more volatile in middle-income economies than in both low and high-income economies. We show that, if the model economy is in the early or in the mature stages of development, multiple equilibria arise. Moreover, we find that in economies with imperfect credit markets, per capita output volatility tneds to be higher than in economies with perfect or non-existent credit markets.

Keywords: Externalities, market imperfections, growth, multiple equilibria, sunspot equilibrium.

JEL Nos.: E00 O11, O16, O40.

© Luis Carranza and José E Galdón-Sánchez. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including  notice, is given to the source.

Contact address: José E Galdón-Sánchez, STICERD, London School of Economics and Political Science, Houghton Street, London WC2A 2AE, UK. Email:

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715 Fuhglw Pdunhw

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716 Htxloleulxp

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814 Pxowlsoh Htxloleuld lq wkh Ghyhorsphqw Surfhvv

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