Endogenous Financial Structure and Monetary Policy

Edgar Ghossoub ()
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Edgar Ghossoub: UTSA

Working Papers from College of Business, University of Texas at San Antonio

Abstract: The objective of this manuscript is study the linkages between the structure of the financial system and monetary policy. In contrast to previous studies with money, the stucture of the financial system is endogenously determined and depends on economic conditions. I show that as economies become more market oriented, it is optimal to set lower inflation targets in order to improve risk sharing that gets distorted by higher stock market participation. Furthermore, I demonstrate that the optimal financial structure depends on the value of money. In particular, it is optimal to promote participation in equity markets when inflation is low - hence to have a market-oriented system. However, when inflation is high, it is optimal to allow banks to play a bigger role in the economy relative to financial markets.

Keywords: Financial Structure; Stock Market; Financial Intermediation; Monetary Policy. (search for similar items in EconPapers)
JEL-codes: E21 E31 E44 G11 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:tsa:wpaper:0153eco

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