Financial intermediaries, markets, and growth

Falko Fecht (), Kevin X. D. Huang and Antoine Martin ()

No 04-24, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: 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.

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