In this paper we build a model of financial intermediation that explains the pattern of GDP variability in an economy during the development process. We find evidence that 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, there is a unique equilibrium. However, in the middle stages of development, multiple equilibria exist. Moreover, we find that in economies with imperfect credit markets, per capita output volatility tends to be higher than in economies with perfect or non-existent credit markets. © 2003 Elsevier B.V. All rights reserved.