Financial Intermediaries, Markets, and Growth

Falko Fecht (), Kevin Huang () and Antoine Martin ()
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Kevin Huang: Department of Economics, Vanderbilt University

No 714, Working Papers from Department of Economics, Vanderbilt University

Abstract: We build a model in which financial intermediaries provide insurance to households against idiosyncratic liquidity shocks. Households can invest in financial markets directly if they pay a cost. In equilibrium, the ability of intermediaries to share risk is constrained by the market. From a growth perspective, 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 can grow more slowly than more market-oriented economies, which is consistent with some recent empirical evidence. We show that the mix of intermediaries and markets that maximizes welfare under a given level of financial development depends on economic fundamentals.

Keywords: Financial intermediaries; financial markets; risk-sharing; growth

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JEL-codes: E44 G10 G20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
Date: 2007-08
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http://www.vanderbilt.edu/Econ/wparchive/workpaper/vu07-w14.pdf First version, 2007 (application/pdf)

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 (2004)
Journal Article: Financial Intermediaries, Markets, and Growth (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:van:wpaper:0714

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