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Costs and Benefits of the Financial Sector

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  • Marc Teignier

    (University of the Basque Country)

  • Francisco Rivadeneyra

    (Bank of Canada)

  • Tiago Pinheiro

    (Norwegian School of Economics)

Abstract

The financial sector allows a better allocation of capital compared to autarchy, increasing the aggregate technology and thus the income growth rate of the economy. At the same time, however, it also amplifies the business cycles through the financial accelerator which increases the volatility of income. In this paper we first present a general equilibrium model which captures both effects of the financial sector. We then parametrize the model to analyze the quantitative effects of policies aimed at reducing the income volatility caused by the financial system. Finally, we study whether limiting the size of the financial sector is welfare enhancing in the context of this model.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1295.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1295

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  1. Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
  2. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Scholarly Articles 12490636, Harvard University Department of Economics.
  3. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  4. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  6. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  7. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 246-265, April.
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