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Financial Markets, Intermediaries, and Intertemporal Smoothing

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  • Allen, Franklin
  • Gale, Douglas

Abstract

In an overlapping generations economy with (incomplete) financial markets but no intermediaries, there is underinvestment in safe assets. In an economy with intermediaries and no financial markets, accumulating reserves of save assets allows returns to be smoothed, nondiversifiable risk to be eliminated, and an ex ante Pareto improvement compared to the allocation in the market equilibrium to be achieved. In a mixed financial system, however, competition from financial markets constrains intermediaries so that they perform no better than markets alone. Copyright 1997 by the University of Chicago.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 105 (1997)
Issue (Month): 3 (June)
Pages: 523-46

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Handle: RePEc:ucp:jpolec:v:105:y:1997:i:3:p:523-46

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  1. Bhattacharya, Sudipto & Padilla, A Jorge, 1996. "Dynamic Banking: A Reconsideration," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 1003-32.
  2. Joseph G. Altonji & Fumio Hayashi & Laurence J. Kotlikoff, 1993. "Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data," NBER Working Papers 3046, National Bureau of Economic Research, Inc.
  3. Allen, F. & Gale, D., 1991. "Limited Market Participation and Volatility of Asset Prices," Weiss Center Working Papers 2-92, Wharton School - Weiss Center for International Financial Research.
  4. Gordon, Roger H. & Varian, Hal R., 1988. "Intergenerational risk sharing," Journal of Public Economics, Elsevier, vol. 37(2), pages 185-202, November.
  5. Allen, Franklin & Gale, Douglas, 1995. "A welfare comparison of intermediaries and financial markets in Germany and the US," European Economic Review, Elsevier, vol. 39(2), pages 179-209, February.
  6. Melitz, Jacques, 1990. "Financial deregulation in France," European Economic Review, Elsevier, vol. 34(2-3), pages 394-402, May.
  7. Qi, Jianping, 1994. "Bank Liquidity and Stability in an Overlapping Generations Model," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 389-417.
  8. Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, vol. 64(2), pages 261-94, March.
  9. Bennett T. McCallum, 1988. "The Optimal Inflation Rate in an Overlapping-Generations Economy with Land," NBER Working Papers 1892, National Bureau of Economic Research, Inc.
  10. Fulghieri, P. & Rovelli, R., 1993. "Capital Markets, Financial Intermediaries, and the Supply of Liquidity in a Dynamic Economy," Papers 93-04, Columbia - Graduate School of Business.
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