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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
    DOI: 10.1086/262081
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    References listed on IDEAS

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