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Costly intermediation and the big push

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  • Zsolt Becsi
  • Ping Wang
  • Mark A. Wynne

Abstract

Many existing theories of financial intermediation have difficulty explaining why financial activity can generate large real effects. This paper argues that the large real effects may reflect a multiplicity of equilibria. The multiple equilibria in this paper are generated by the dynamic interactions between the savings decisions of workers and the monopolistically competitive behavior of banks. We characterize the equilibria by showing the comparative-static responses of key aggregates to changes in the pure rate of time preference, investment uncertainty, and bank costs. We find that the results depend crucially on the intertemporal elasticity of labor supply and the aggregate level of employment. Small changes in the financial system may cause the economy to shift between low- and high-employment equilibria. The high-employment, high real interest rate equilibrium is consistent with the development experience of Japan, Korea, and Taiwan with repressed financial systems.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 98-16.

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Date of creation: 1998
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Publication status: Published in Journal of Development Economics, August 1999
Handle: RePEc:fip:fedawp:98-16

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Keywords: Economic development;

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  1. Mayer, Colin, 1988. "New issues in corporate finance," European Economic Review, Elsevier, vol. 32(5), pages 1167-1183, June.
  2. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
  3. Cooley, T.F. & Smith, B.D., 1991. "Indivisible Assets, Equilibrium, and the Value of Intermediary Output," Papers 90-05, Rochester, Business - General.
  4. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
  5. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June.
  6. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  7. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  8. Zsolt Becsi & Ping Wang & Mark A. Wynne, 1998. "Endogenous market structures and financial development," Working Paper 98-15, Federal Reserve Bank of Atlanta.
  9. Zsolt Becsi & Ping Wang, 1997. "Financial development and growth," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 46-62.
  10. Russell Cooper & Joao Ejarque, 1994. "Financial Intermediation and Aggregate Fluctuations: A Quantative Analysis," NBER Working Papers 4819, National Bureau of Economic Research, Inc.
  11. Sussman, Oren & Zeira, Joseph, 1995. "Banking and Development," CEPR Discussion Papers 1127, C.E.P.R. Discussion Papers.
  12. Colin Mayer, 1990. "Financial Systems, Corporate Finance, and Economic Development," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 307-332 National Bureau of Economic Research, Inc.
  13. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
  14. Rudiger Dornbusch & Yung Chul Park, 1987. "Korean Growth Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 389-454.
  15. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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