Financial Intermediation, Variability and The Development Process

In this paper the authors build a model of financial intermediation that explains the GDP variability pattern of an economy during the development process.

In the model presented the per capita outcome is more volatile in middle income countries than in low and high income countries. The authors show that if the model economy is in the early or mature stages of development there is a unique equilibrium. However in the middle stages of development, multiple equilibria arise. The authors also find that in economies with imperfect credit markets, per capita output volatility tends to be higher than in markets with perfect or non-existent credit markets.