Financial intermediaries, markets, and growth

Falko Fecht (), Kevin Huang and Antoine Martin ()

No RWP 04-02, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: In many models of financial intermediation, markets reduce welfare because they limit the amount of risk-sharing intermediaries can offer. In this paper we study a model in which markets also promote investment in a productive technology. A trade-off between risk sharing and growth arises endogenously. In the model, 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. We show the mix of intermediaries and market that maximizes welfare depend on parameter values. We also show the optimal mix of two very similar economies can be very different.

Keywords: Financial; markets (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fin, nep-ias and nep-mfd
Date: 2004
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Related works:
Working Paper: Financial intermediaries, markets, and growth (2004)
Working Paper: Financial intermediaries, markets and growth (2005)
Working Paper: Financial intermediaries, markets, and growth (2004)
Working Paper: Financial Intermediaries, Markets, and Growth (2007)
Journal Article: Financial Intermediaries, Markets, and Growth (2008)
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