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Financial intermediaries, markets and growth

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  • Fecht, Falko
  • Huang, Kevin
  • Martin, Antoine

Abstract

We build a model in which financial intermediaries provide insurance to households against a liquidity shock. Households can also invest directly on a financial market if they pay a cost. In equilibrium, the ability of intermediaries to share risk is constrained by the market. 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 should grow slower than more market-oriented economies, which is consistent with some recent empirical evidence. We show that the mix of intermediaries and market that maximizes welfare under a given level of financial development depends on economic fundamentals. We also show the optimal mix of two structurally very similar economies can be very different. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2005,03.

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Date of creation: 2005
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Handle: RePEc:zbw:bubdp1:2937

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Keywords: Financial Intermediaries; Risk Sharing; Finance and Growth; Comparing Financial Systems;

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References

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  1. Ross Levine, 2002. "Bank-Based or Market-Based Financial Systems: Which is Better?," William Davidson Institute Working Papers Series 442, William Davidson Institute at the University of Michigan.
  2. Enrique L. Kawamura & Gaetano Antinolfi, 2005. "Banking and Markets in a Monetary Model," Working Papers, Universidad de San Andres, Departamento de Economia 79, Universidad de San Andres, Departamento de Economia, revised Feb 2005.
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  12. Raghuram G. Rajan & Luigi Zingales, 2001. "Financial Systems, Industrial Structure, and Growth," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 17(4), pages 467-482.
  13. Franklin Allen & Douglas Gale, 1995. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 95-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
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  19. Fulghieri, Paolo & Rovelli, Riccardo, 1998. "Capital markets, financial intermediaries, and liquidity supply," Journal of Banking & Finance, Elsevier, Elsevier, vol. 22(9), pages 1157-1180, September.
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  21. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  22. Neuburger, Hugh & Stokes, Houston H., 1974. "German Banks and German Growth, 1883–1913: an Empirical View," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 34(03), pages 710-731, September.
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  25. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 401-19, June.
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