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Comparing Financial Systems

Author

Listed:
  • Franklin Allen

    (University of Pennsylvania)

  • Douglas Gale

    (New York University)

Abstract

Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms; they allow intertemporal smoothing of consumption by households and expenditures by firms; and they enable households and firms to share risks. These functions are common to the financial systems of most developed economies. Yet the form of these financial systems varies widely. Why do different countries have such different financial systems? Is one system better than all the others? Do different systems merely represent alternative ways of satisfying similar needs? Is the current trend toward market-based systems desirable? Franklin Allen and Douglas Gale argue that the view that market-based systems are best is simplistic. A more nuanced approach is necessary. Financial institutions are not simply veils, disguising the allocation mechanism without affecting it, but are crucial to overcoming market imperfections. An optimal financial system relies on both financial markets and financial intermediaries.

Suggested Citation

  • Franklin Allen & Douglas Gale, 2001. "Comparing Financial Systems," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262511258, December.
    • Handle: RePEc:mtp:titles:0262511258
    as

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    More about this item

    Keywords

    financial systems;

    JEL classification:

    • G0 - Financial Economics - - General
    • P5 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems

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