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Endogenous Financial Structure and Monetary Policy

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  • Edgar A. Ghossoub

    (UTSA)

Abstract

The objective of this manuscript is study the linkages between the structure of the financial system and monetary policy. In contrast to previous studies with money, the stucture of the financial system is endogenously determined and depends on economic conditions. I show that as economies become more market oriented, it is optimal to set lower inflation targets in order to improve risk sharing that gets distorted by higher stock market participation. Furthermore, I demonstrate that the optimal financial structure depends on the value of money. In particular, it is optimal to promote participation in equity markets when inflation is low - hence to have a market-oriented system. However, when inflation is high, it is optimal to allow banks to play a bigger role in the economy relative to financial markets.

Suggested Citation

  • Edgar A. Ghossoub, 2015. "Endogenous Financial Structure and Monetary Policy," Working Papers 0162eco, College of Business, University of Texas at San Antonio.
    • Handle: RePEc:tsa:wpaper:0162eco
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial Structure; Stock Market; Financial Intermediation; Monetary Policy;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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