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Financial Intermediaries, Markets, and Growth

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  • Falko Fecht

    ()
    (Deutsche Bundesbank)

  • Kevin X.D. Huang

    ()
    (Department of Economics, Vanderbilt University)

  • Antoine Martin

    ()
    (Federal Reserve Bank of New York)

Abstract

We build a model in which financial intermediaries provide insurance to households against idiosyncratic liquidity shocks. Households can invest in financial markets directly if they pay a cost. In equilibrium, the ability of intermediaries to share risk is constrained by the market. From a growth perspective, this can be beneficial because intermediaries invest less in the productive technology when they provide more risk-sharing. Our model predicts that bank-oriented economies can grow more slowly than more market-oriented economies, which is consistent with some recent empirical evidence. We show that the mix of intermediaries and markets that maximizes welfare under a given level of financial development depends on economic fundamentals.

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File URL: http://www.accessecon.com/pubs/VUECON/vu07-w14.pdf
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0714.

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Date of creation: Aug 2007
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Handle: RePEc:van:wpaper:0714

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: Financial intermediaries; financial markets; risk-sharing; growth ;

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