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Costly Financial Intermediation in Neoclassical Growth Theory

Rajnish Mehra (), Facundo Piguillem () and Edward Prescott

No 14351, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E2 E44 E6 G1 G11 G12 G23 (search for similar items in EconPapers)
Date: 2008-09
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
Note: AP EFG
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Published as 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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