Financial Markets, Intermediaries, and Intertemporal Smoothing

JOURNAL OF POLITICAL ECONOMY, Vol 105 No 3, June 1997

Posted: 14 Jul 1997  

Franklin Allen

Imperial College London

Douglas M. Gale

New York University (NYU) - Department of Economics

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Abstract

In an overlapping generations economy with (incomplete) financial markets but no intermediaries, there is underinvestment in safe assets. In an economy with intermediaries and no financial markets, accumulating reserves of safe assets allows returns to be smoothed, nondiversifiable risk to be eliminated, and an ex ante Pareto improvement compared to the allocation in the market equilibrium to be achieved. In a mixed financial system, however, competition from financial markets constrains intermediaries so that they perform no better than markets alone.

JEL Classification: E44, G10, G20

Suggested Citation

Allen, Franklin and Gale, Douglas M., Financial Markets, Intermediaries, and Intertemporal Smoothing. JOURNAL OF POLITICAL ECONOMY, Vol 105 No 3, June 1997. Available at SSRN: https://ssrn.com/abstract=8633

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Douglas M. Gale

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States
(212) 998-8944 (Phone)
(212) 995-3932 (Fax)

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