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Dynamic Banking: A Reconsideration

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  • Bhattacharya, S.
  • Padilla, A.J.

Abstract

Financially Intermediated and Stock Market consumption-investment allocations, with (and without) governmental interventions, are compared in a welfare sense in overlapping generations economies with ( and without) shocks to agents’ international preferences. We show that, first, tax-subsidy schemes under the same informational requirements needed for financial intermediation to function, lead to stock market allocations that are identical, or superior, to those attained under financial intermediation. Second, we argue that the necessary interventions are qualitatively no different from those required to implement stationary optimal allocations in OLG models without uncertainty regarding agents’ consumption preferences. Thus, we conclude that the provision of liquidity is tangential to stock market efficiency.
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Suggested Citation

  • Bhattacharya, S. & Padilla, A.J., 1994. "Dynamic Banking: A Reconsideration," Papers 9413, Centro de Estudios Monetarios Y Financieros-.
  • Handle: RePEc:fth:cemfdt:9413
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    Cited by:

    1. Antoine Martin & David Skeie & Ernst-Ludwig von Thadden, 2014. "Repo Runs," Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 957-989.
    2. Dwyer Jr., Gerald P. & Samartín, Margarita, 2009. "Why do banks promise to pay par on demand?," Journal of Financial Stability, Elsevier, vol. 5(2), pages 147-169, June.
    3. Allen, Franklin & Gale, Douglas, 1995. "A welfare comparison of intermediaries and financial markets in Germany and the US," European Economic Review, Elsevier, vol. 39(2), pages 179-209, February.
    4. Qian, Yiming & John, Kose & John, Teresa A., 2004. "Financial system design and liquidity provision by banks and markets in a dynamic economy," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 385-403, April.
    5. 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.
    6. Jos van Bommel, 2007. "Endogenous Cycles and Liquidity Risk," Money Macro and Finance (MMF) Research Group Conference 2006 149, Money Macro and Finance Research Group.
    7. Hasman, Augusto & Samartín, Margarita & van Bommel, Jos, 2014. "Financial intermediation in an overlapping generations model with transaction costs," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 111-125.
    8. Ioannis Lazopoulos, 2005. "Cycles And Banking Crisis," Money Macro and Finance (MMF) Research Group Conference 2005 15, Money Macro and Finance Research Group.
    9. Samartín Sáenz, Margarita, 1998. "The role of demand deposits in risk sharing," DEE - Working Papers. Business Economics. WB 6530, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    10. Mallick, Indrajit, 2004. "Strategic Allocation of Liquidity in the InterBank Money Market," MPRA Paper 15427, University Library of Munich, Germany.
    11. Gersbachd, Hans, 1998. "Liquidity Creation, Efficiency, and Free Banking," Journal of Financial Intermediation, Elsevier, vol. 7(1), pages 91-118, January.

    More about this item

    Keywords

    FINANCIAL MARKET; BANKING;

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