Can Financial Intermediation Induce Economic Fluctuations?
We construct a model to show that active financial intermediation can induce economic fluctuations. We embed a financial sector in a simple overlapping generation model with a single stock of capital. Individuals are risk averse agents that face idiosyncratic risks in their business activities: Due to limited liability, agents have incentives to invest in a technology that produces high output with a smaller probability. Financial intermediaries (FIs) are risk neutral. We distinguish two scenarios. The first scenario is one with active financial intermediation: the FIs lends only on the conditions that borrowers accept restrictions on their investments. In the second scenario, financial intermediation is passive, in that the FIs lend without monitoring the activities of the borrowers. For a given loan size, the investment level under active financial intermediation is shown to be smaller than under passive financial intermediation. This fact alone creates, in the first scenario, an income effect that may generate fluctuations in investment. (This effect is absent under passive financial intermediation, and, as a result, in our model there are no fluctuations under passive financial intermediation.) Thus business cycles and possibly chaotic dynamics can be, under certain conditions, generated by active intermediation. On étudie un modèle qui montre que l'intermédiation active des institutions financières peut générer les fluctuations. Il s'agit d'un modèle aux générations imbriquées avec un stock de capital. Les individus sont riscophobes, tandis que les institutions financières (I.F.) ne le sont pas. On considère deux cas. Dans le premier cas, les I.F. sont actives: elles prêtent de l'argent sous la condition que les emprunteurs acceptent des restrictions sur leurs choix de projets d'investissement. Dans le deuxième cas, les I.F. sont passives. Nous démontrons que si les I.F. sont actives, les conditions de prêts peuvent créer un effet de richesse qui peut générer les fluctuations du taux d'investissement, et du P.I.B.
|Date of creation:||01 Nov 2000|
|Contact details of provider:|| Postal: 1130 rue Sherbrooke Ouest, suite 1400, Montréal, Quéc, H3A 2M8|
Phone: (514) 985-4000
Fax: (514) 985-4039
Web page: http://www.cirano.qc.ca/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Boldrin, Michele & Woodford, Michael, 1990.
"Equilibrium models displaying endogenous fluctuations and chaos : A survey,"
Journal of Monetary Economics,
Elsevier, vol. 25(2), pages 189-222, March.
- Michele Boldrin & Michael Woodford, 1988. "Equilibruim Models Displaying Endogenous Fluctuations and Chaos: A Survey," UCLA Economics Working Papers 530, UCLA Department of Economics.
- de Meza, David & Webb, David, 1999. "Wealth, Enterprise and Credit Policy," Economic Journal, Royal Economic Society, vol. 109(455), pages 153-163, April.
- 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.
- Franklin Allen & Douglas Gale, 1995. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Center for Financial Institutions Working Papers 95-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Franklin Allen & Douglas Gale, 1996. "Financial Markets, Intermediaries and Intertemporal Smoothing," Center for Financial Institutions Working Papers 96-33, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Franklin Allen & Douglas Gale, 1995. "Financial markets, intermediaries, and intertemporal smoothing," Working Papers 95-4, Federal Reserve Bank of Philadelphia.
- Bruce D. Smith, 1991. "Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 93-105.
- Smith, B.D., 1988. "Interest On Reserves And Sunspot Equilibria: Friedman'S Proposal Reconsidered," RCER Working Papers 119, University of Rochester - Center for Economic Research (RCER).
- Schreft, Stacey L. & Smith, Bruce D., 1997. "Money, Banking, and Capital Formation," Journal of Economic Theory, Elsevier, vol. 73(1), pages 157-182, March.
- Stacey L. Schreft & Bruce D. Smith, 1994. "Money, banking, and capital formation," Working Paper 94-05, Federal Reserve Bank of Richmond.
- Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
- Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
- Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-419, June.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038.
- Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
- Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-1400, September. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:cir:cirwor:2000s-51. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Webmaster)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.