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Financial intermediaries, markets, and growth

Listed author(s):
  • Falko Fecht
  • Kevin Huang

This paper contributes to the literature comparing the relative performance of financial intermediaries and markets by studying an environment in which a trade-off between risk sharing and growth arises endogenously. 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. Moreover, intermediaries invest less in the productive technology when they provide more risk-sharing. This creates a trade-off between risk-sharing and growth. We show the balance of intermediaries and market that maximizes welfare depend on parameter values.

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File URL: http://repec.org/esNASM04/up.27430.1075497028.pdf
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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 419.

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Date of creation: 11 Aug 2004
Handle: RePEc:ecm:nasm04:419
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  1. 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.
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  15. Enrique L. Kawamura & Gaetano Antinolfi, 2005. "Banking and Markets in a Monetary Model," Working Papers 79, Universidad de San Andres, Departamento de Economia, revised Feb 2005.
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  18. O. Emre Ergungor, 2003. "Financial system structure and economic development: structure matters," Working Paper 0305, Federal Reserve Bank of Cleveland.
  19. Neuburger, Hugh & Stokes, Houston H., 1974. "German Banks and German Growth, 1883–1913: an Empirical View," The Journal of Economic History, Cambridge University Press, vol. 34(03), pages 710-731, September.
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