Can Financial Intermediation Induce Endogenous Fluctuations?
AbstractThis paper studies the possibility of endogenous fluctuations caused by activities of financial intermediaries. Risk-averse agents borrow from banks and invest in a risky two-state capital technology. The probability of success with the technology is assumed to be decreasing in the amount of capital invested. In a complete information setting with intermediation, the efficient loan contract achieves complete risk sharing but the amount invested in the risky project is smaller than the loan size. This "income effect" is responsible for the endogenous generation of complex dynamics. In the absence of intermediation, the economy studied cannot exhibit any cyclical fluctuations.
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10953.
Date of creation: 01 Oct 2004
Date of revision:
Publication status: Published in Journal of Economic Dynamics and Control, October 2004, vol. 28 no. 11, pp. 2215-2238
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
More information through EDIRC
financial intermediation; endogenous fluctuations; loan contracts;
Other versions of this item:
- Banerji, Sanjay & Bhattacharya, Joydeep & Long, Ngo Van, 2004. "Can financial intermediation induce endogenous fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 28(11), pages 2215-2238, October.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G20 - Financial Economics - - Financial Institutions and Services - - - General
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