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Financial intermediaries, markets and growth

  • Fecht, Falko
  • Huang, Kevin
  • Martin, Antoine

We build a model in which 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. This can be beneficial because intermediaries invest less in the productive technology when they provide more risk-sharing. Our model predicts that bank-oriented economies should grow slower than more market-oriented economies, which is consistent with some recent empirical evidence. We show that the mix of intermediaries and market that maximizes welfare under a given level of financial development depends on economic fundamentals. We also show the optimal mix of two structurally very similar economies can be very different.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2005,03.

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Date of creation: 2005
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Handle: RePEc:zbw:bubdp1:2937
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  19. O. Emre Ergungor, 2003. "Financial system structure and economic development: structure matters," Working Paper 0305, Federal Reserve Bank of Cleveland.
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