Financial Markets, Intermediaries, and Intertemporal Smoothing
JOURNAL OF POLITICAL ECONOMY, Vol 105 No 3, June 1997
Posted: 14 Jul 1997
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: Suggested Citation