Investigating output cycles under two alternative financial systems

Sharon K. Blei

No 2007-04, Supervisory Policy Analysis Working Papers from Federal Reserve Bank of St. Louis

Abstract: Different financial systems vary in the way they contribute to the process of resource allocation in the economy and in the risk-sharing pattern that they bring about. It would therefore be plausible to expect different financial systems to differ in the way they affect real economic activity. I hereby provide a theoretic framework for the comparison and analysis of output cycles under two alternative financial systems: an equity-based financial system (EFS), in which a mutual fund functions as a financial intermediary, versus a debt-based financial system (DFS), in which a bank plays that role. The research points that DFS generates larger output cycles and a higher expected output than EFS. The mechanism that generates these results is the counter-cyclical effect of savings' behavior under EFS.

Keywords: Financial markets; Financial services industry (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mac
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