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International financial intermediation and aggregate fluctuations under alternative exchange rate regimes

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  • Jeremy Greenwood
  • Stephen D. Williamson

Abstract

This paper presents a two-country overlapping generations model in which financial intermediation arises endogenously as an incentive-compatible means of economizing on monitoring costs. Because of the existence of transactions costs, money markets in the two countries are segmented and investors have differential access to international credit markets. The model is used to generate predictions about the role of international intermediation in economic development and to examine the nature of business cycle phenomena across alternative exchange rate regimes. Disturbances are propagated by a credit allocation mechanism, which also lends a novel flavor to the model’s long-run properties.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 112.

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Date of creation: 1988
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Handle: RePEc:fip:fedmsr:112

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Keywords: Foreign exchange - Law and legislation ; International finance ; Foreign exchange rates;

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References

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  1. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  2. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
  3. Alan C. Stockman & Lars E.O. Svensson, 1985. "Capital Flows, Investment, and Exchange Rates," NBER Working Papers 1598, National Bureau of Economic Research, Inc.
  4. Alan C. Stockman, 1981. "Effects of Inflation on the Pattern of International Trade," NBER Working Papers 0713, National Bureau of Economic Research, Inc.
  5. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  6. Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 207-22, May.
  7. Thomas J. Sargent, 1982. "Beyond demand and supply curves in macroeconomics," Staff Report 77, Federal Reserve Bank of Minneapolis.
  8. Svensson, Lars E O & van Wijnbergen, Sweder, 1989. "Excess Capacity, Monopolistic Competition, and International Transmission of Monetary Disturbances," Economic Journal, Royal Economic Society, vol. 99(397), pages 785-805, September.
  9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  10. Helpman, Elhanan & Razin, Assaf, 1982. "Dynamics of a Floating Exchange Rate Regime," Scholarly Articles 3445095, Harvard University Department of Economics.
  11. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
  12. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  13. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  14. Freeman, Scott & Murphy, Robert G., 1989. "Inside money and the open economy," Journal of International Economics, Elsevier, vol. 26(1-2), pages 29-51, February.
  15. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  16. Aschauer, David & Greenwood, Jeremy, 1983. "A Further Exploration in the Theory of Exchange Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 91(5), pages 868-75, October.
  17. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  18. Townsend, Robert M, 1983. "Financial Structure and Economic Activity," American Economic Review, American Economic Association, vol. 73(5), pages 895-911, December.
  19. Greenwood, Jeremy & Huffman, Gregory W., 1987. "A dynamic equilibrium model of inflation and unemployment," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 203-228, March.
  20. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-61, December.
  21. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  22. Freeman, Scott & Huffman, Gregory W, 1991. "Inside Money, Output, and Causality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 645-67, August.
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Citations

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Cited by:
  1. Choi, Woon Gyu & Cook, David, 2004. "Liability dollarization and the bank balance sheet channel," Journal of International Economics, Elsevier, vol. 64(2), pages 247-275, December.
  2. Ventura, Jaume, 2005. "Global View of Economic Growth," CEPR Discussion Papers 5059, C.E.P.R. Discussion Papers.
  3. Amado Peiró, 2002. "Macroeconomic Synchronization Between G3 Countries," Working Papers. Serie EC 2002-16, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  4. Toichiro Asada & Carl Chiarella & Peter Flaschel & Reiner Franke, . "Interacting Two-Country Business Fluctuations," Modeling, Computing, and Mastering Complexity 2003 02, Society for Computational Economics.
  5. Grilli, Vittorio & Roubini, Nouriel, 1991. "Financial Intermediation and Monetary Policies in the World Economy," CEPR Discussion Papers 566, C.E.P.R. Discussion Papers.
  6. Stephen D. Williamson, 1989. "Restrictions on financial intermediaries and implications for aggregate fluctuations: Canada and the United States, 1870-1913," Staff Report 119, Federal Reserve Bank of Minneapolis.
  7. Joseph G. Haubrich, 1991. "Financial efficiency and aggregate fluctuations: an exploration," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 25-36.
  8. Javier Diaz-Gimenez & Edward C. Prescott & Terry Fitzgerald & Fernando Alvarez, 1992. "Banking in computable general equilibrium economies," Staff Report 153, Federal Reserve Bank of Minneapolis.
  9. Wagner, W.B., 2000. "Decentralized International Risk Sharing and Governmental Moral Hazard," Discussion Paper 2000-92, Tilburg University, Center for Economic Research.
  10. Mark Gertler & Kenneth Rogoff, 1989. "Developing Country Borrowing and Domestic Wealth," NBER Working Papers 2887, National Bureau of Economic Research, Inc.
  11. Alberto Giovannini, 1991. "The Currency Reform as the Last Stage of Economic and Monetary Union: Some Policy Questions," NBER Working Papers 3917, National Bureau of Economic Research, Inc.
  12. Peiro, Amado, 2005. "Economic comovements in European countries," Journal of Policy Modeling, Elsevier, vol. 27(5), pages 575-584, July.
  13. Amado Peiró, 2002. "Macroeconomic Synchronization Between G3 Countries," German Economic Review, Verein für Socialpolitik, vol. 3(2), pages 137-153, 05.
  14. Amado Peiró, 2000. "Economic Comovements In European Countries," Working Papers. Serie EC 2000-19, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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