NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Costly Financial Intermediation in Neoclassical Growth Theory

Rajnish Mehra, Facundo Piguillem, Edward C. Prescott

NBER Working Paper No. 14351
Issued in September 2008
NBER Program(s):   AP   EFG

The neoclassical growth model is extended to include costly intermediated borrowing and lending between households. This is an important extension as substantial resources are used in intermediating the large amount of borrowing and lending between households. In 2007, in the United States, the amount intermediated was 1.7 times GNP, and the resources used in this intermediation amounted to at least 3.4 percent of GNP. The theory implies that financial intermediation services are an intermediate good and that the spread between borrowing and lending rates measures the efficiency of the financial sector.

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This paper was revised on December 5, 2011

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Document Object Identifier (DOI): 10.3386/w14351

Published: Rajnish Mehra & Facundo Piguillem & Edward C. Prescott, 2011. "Costly financial intermediation in neoclassical growth theory," Quantitative Economics, Econometric Society, vol. 2(1), pages 1-36, 03.

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