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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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  1. Greenwood, J. & Jovanovic, B., 1988. "Financial Development, Growth, And The Distribution Of Income," RCER Working Papers 131, University of Rochester - Center for Economic Research (RCER).
  2. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
  3. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  4. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
  5. 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.
  6. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 246-265, April.
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