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Costs and Benefits of the Financial Sector

  • Marc Teignier

    (University of the Basque Country)

  • Francisco Rivadeneyra

    (Bank of Canada)

  • Tiago Pinheiro

    (Norwegian School of Economics)

The financial sector allows a better allocation of capital compared to autarchy, increasing the aggregate technology and thus the income growth rate of the economy. At the same time, however, it also amplifies the business cycles through the financial accelerator which increases the volatility of income. In this paper we first present a general equilibrium model which captures both effects of the financial sector. We then parametrize the model to analyze the quantitative effects of policies aimed at reducing the income volatility caused by the financial system. Finally, we study whether limiting the size of the financial sector is welfare enhancing in the context of this model.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1295.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1295
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Markus K. Brunnermeier & Yuliy Sannikov, 2012. "A macroeconomic model with a financial sector," Working Paper Research 236, National Bank of Belgium.
  2. Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599 Elsevier.
  3. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  4. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
  5. Kiminori Matsuyama, 2007. "Aggregate Implications of Credit Market Imperfections," NBER Working Papers 13209, National Bureau of Economic Research, Inc.
  6. 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 401-19, June.
  7. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Scholarly Articles 12490636, Harvard University Department of Economics.
  8. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
  9. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
  10. Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
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