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The development and structure of financial systems

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  • Chakraborty, Shankha
  • Ray, Tridip

Abstract

We introduce monitored bank loans and non-monitored tradeable securities as sources of external finance for firms in a dynamic general equilibrium model. Due to frictions arising from moral hazard, access to credit and each type of financial instrument are determined by the wealth distribution. We study the depth of credit markets (financial development) and conditions under which the financial system relies more on either type of external finance (financial structure). Initial inequality is shown to determine financial development, with high inequality preventing developed systems from emerging. A more equitable income distribution as well as larger capital requirements of industry tend to promote a bank-based system. Investment risk promotes a greater reliance on non- monitored sources, while institutional parameters affect the financial structure in intuitively plausible ways. The model's predictions are consistent with historical and recent development experience.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 31 (2007)
Issue (Month): 9 (September)
Pages: 2920-2956

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Handle: RePEc:eee:dyncon:v:31:y:2007:i:9:p:2920-2956

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Cited by:
  1. Dietrich Vollrath & Lennart Erickson, 2007. "Land Distribution and Financial System Development," IMF Working Papers 07/83, International Monetary Fund.
  2. Sambit Bhattacharyya, 2011. "Political Origins of Financial Structure," Economics Series Working Papers WPS/2011-20, University of Oxford, Department of Economics.
  3. Vollrath, Dietrich, 2008. "Agrarian Structure and Endogenous Financial System Development," MPRA Paper 12430, University Library of Munich, Germany.

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