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On the Welfare and Distributional Implications of Intermediation Costs

Tiago Cavalcanti (), Anne P. Villamil and António Antunes ()
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Anne P. Villamil: University of Illinois at Urbana-Champaign

No 621, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the distributional implications of intermediation costs. We built a "Bewley" model economy where individuals experience uninsurable idiosyncratic shocks on labor productivity and financial intermediation is costly. Individuals smooth consumption by making deposits to a financial intermediary in good times and by running down credit balances or getting loans in bad times. Higher intermediation costs (IC) increase the costs for individuals to insure against idiosyncratic shocks and to smooth consumption over time. When IC increase by a factor of 10 from its baseline value of 4% (US case), aggregate welfare decreases by less than 1% of the average consumption. For those at the bottom 1% of the wealth distribution the welfare costs are roughly 41% of their consumption, while for those at the top 1% it is -0.17%.

Date: 2007
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Working Paper: ON THE WELFARE AND DISTRIBUTIONAL IMPLICATIONS OF INTERMEDIATION COSTS (2005) Downloads
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