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Financial Markets, Intermediaries, and Intertemporal Smoothing

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  • Allen, Franklin
  • Gale, Douglas

Abstract

In an overlapping generations economy with (incomplete) financial markets but no intermediaries, there is underinvestment in safe assets. In an economy with intermediaries and no financial markets, accumulating reserves of save assets allows returns to be smoothed, nondiversifiable risk to be eliminated, and an ex ante Pareto improvement compared to the allocation in the market equilibrium to be achieved. In a mixed financial system, however, competition from financial markets constrains intermediaries so that they perform no better than markets alone. Copyright 1997 by the University of Chicago.

Suggested Citation

  • Allen, Franklin & Gale, Douglas, 1997. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 523-546, June.
  • Handle: RePEc:ucp:jpolec:v:105:y:1997:i:3:p:523-46
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    References listed on IDEAS

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    1. Bhattacharya, Sudipto & Padilla, A Jorge, 1996. "Dynamic Banking: A Reconsideration," Review of Financial Studies, Society for Financial Studies, pages 1003-1032.
    2. Melitz, Jacques, 1990. "Financial deregulation in France," European Economic Review, Elsevier, pages 394-402.
    3. Fulghieri, P. & Rovelli, R., 1993. "Capital Markets, Financial Intermediaries, and the Supply of Liquidity in a Dynamic Economy," Papers 93-04, Columbia - Graduate School of Business.
    4. Altonji, Joseph G & Hayashi, Fumio & Kotlikoff, Laurence J, 1992. "Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data," American Economic Review, American Economic Association, pages 1177-1198.
    5. Bhattacharya, S. & Padilla, A. Jorge, 1994. "Dynamic Banking : A Reconsideration," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1994031, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    6. Gordon, Roger H. & Varian, Hal R., 1988. "Intergenerational risk sharing," Journal of Public Economics, Elsevier, pages 185-202.
    7. Allen, Franklin & Gale, Douglas, 1995. "A welfare comparison of intermediaries and financial markets in Germany and the US," European Economic Review, Elsevier, pages 179-209.
    8. Bennett T. McCallum, 1986. "The Optimal Inflation Rate in an Overlapping-Generations Economy with Land," NBER Working Papers 1892, National Bureau of Economic Research, Inc.
    9. Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, pages 218-241.
    10. Gordon, Roger H. & Varian, Hal R., 1988. "Intergenerational risk sharing," Journal of Public Economics, Elsevier, pages 185-202.
    11. Qi, Jianping, 1994. "Bank Liquidity and Stability in an Overlapping Generations Model," Review of Financial Studies, Society for Financial Studies, pages 389-417.
    12. Altonji, Joseph G & Hayashi, Fumio & Kotlikoff, Laurence J, 1992. "Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data," American Economic Review, American Economic Association, pages 1177-1198.
    13. Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, pages 261-294.
    14. Gale, D. & Allen, F., 1991. "Limited Market Participation and Volatility of Asset Prices," Weiss Center Working Papers 14-91, Wharton School - Weiss Center for International Financial Research.
    15. Bhattacharya, Sudipto & Padilla, A Jorge, 1996. "Dynamic Banking: A Reconsideration," Review of Financial Studies, Society for Financial Studies, pages 1003-1032.
    16. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, pages 933-955.
    17. Allen, F. & Gale, D., 1991. "Limited Market Participation and Volatility of Asset Prices," Weiss Center Working Papers 2-92, Wharton School - Weiss Center for International Financial Research.
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