Costly financial intermediation in neoclassical growth theory

Rajnish Mehra, Facundo Piguillem, Edward Prescott

Research output: Contribution to journalArticlepeer-review

15 Scopus citations


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 to intermediate the large amount of borrowing and lending between households. In 2007, in the United States, the amount intermediated was 1.7 times gross national product (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.

Original languageEnglish (US)
Pages (from-to)1-36
Number of pages36
JournalQuantitative Economics
Issue number1
StatePublished - Mar 2011


  • Aggregate intermediation
  • Borrowing
  • Equity premium
  • Government debt
  • Lending
  • Life cycle savings
  • Retirement

ASJC Scopus subject areas

  • Economics and Econometrics


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