Financial Intermediaries, Markets, and Growth

FRB of Kansas City Working Paper No. 04-02

49 Pages Posted: 5 Aug 2004

See all articles by Falko Fecht

Falko Fecht

Frankfurt School of Finance & Management

Kevin X. D. Huang

Federal Reserve Bank of Philadelphia; Vanderbilt University - College of Arts and Science - Department of Economics

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2004

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 depends on parameter values. We also show the optimal mix of two very similar economies can be very different.

Keywords: Financial Intermediaries, Financial Markets, Risk-Sharing, Growth

JEL Classification: E44, G10, G20

Suggested Citation

Fecht, Falko and Huang, Kevin X. D. and Martin, Antoine, Financial Intermediaries, Markets, and Growth (May 2004). FRB of Kansas City Working Paper No. 04-02. Available at SSRN: https://ssrn.com/abstract=562544 or http://dx.doi.org/10.2139/ssrn.562544

Falko Fecht (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Kevin X. D. Huang

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

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