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Financial Intermediaries, Markets, and Growth

  • FALKO FECHT
  • KEVIN X. D. HUANG
  • ANTOINE MARTIN

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. Copyright (c) 2008 Federal Reserve Bank of New York with Exclusive License to Print by The Ohio State University.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 40 (2008)
Issue (Month): 4 (06)
Pages: 701-720

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Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:4:p:701-720
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