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The Development and Structure of Financial Systems

Author

Listed:
  • Shankha Chakraborty

    (University of Oregon Economics Department)

  • Tridip Ray

    (Hong Kong University of Science & Technology Economics Department)

Abstract

We introduce monitored bank loans and non-monitored tradeable securities as sources of external finance for firms in a dynamic general equilibrium model. Due to frictions arising from moral hazard, access to credit and each type of financial instrument are determined by the wealth distribution. We study the depth of credit markets (financial development) and conditions under which the financial system relies more on either type of external finance (financial structure). Initial inequality is shown to determine financial development, with high inequality preventing developed systems from emerging. A more equitable income distribution as well as larger capital requirements of industry tend to promote a bank-based system. Investment risk promotes a greater reliance on non- monitored sources, while institutional parameters affect the financial structure in intuitively plausible ways. The model's predictions are consistent with historical and recent development experience.

Suggested Citation

  • Shankha Chakraborty & Tridip Ray, 2003. "The Development and Structure of Financial Systems," University of Oregon Economics Department Working Papers 2003-2, University of Oregon Economics Department, revised 01 Dec 2003.
    • Handle: RePEc:ore:uoecwp:2003-2
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    References listed on IDEAS

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    2. Vollrath, Dietrich, 2008. "Agrarian Structure and Endogenous Financial System Development," MPRA Paper 11538, University Library of Munich, Germany.
    3. Stefano Ugolini, 2021. "The coevolution of banks and corporate securities markets: The financing of Belgium’s industrial take-off in the 1830s," Business History, Taylor & Francis Journals, vol. 63(6), pages 892-913, August.
    4. Guangdong Xu, 2022. "From financial structure to economic growth: Theory, evidence and challenges," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 51(1), February.
    5. Mr. Dietrich Vollrath & Mr. Lennart Erickson, 2007. "Land Distribution and Financial System Development," IMF Working Papers 2007/083, International Monetary Fund.
    6. Bhattacharyya, Sambit, 2013. "Political origins of financial structure," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 979-994.

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    More about this item

    Keywords

    Inequality; Industrialization; Financial; Development; Financial Structure; Bank Finance; Market Finance; Credit Frictions.;
    All these keywords.

    JEL classification:

    • D0 - Microeconomics - - General

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