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Financial intermediaries, markets, and growth

Author

Listed:
  • Falko Fecht
  • Kevin X. D. Huang
  • Antoine Martin
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 depend on parameter values. We also show the optimal mix of two very similar economies can be very different.

Suggested Citation

  • Falko Fecht & Kevin X. D. Huang & Antoine Martin, 2004. "Financial intermediaries, markets, and growth," Research Working Paper RWP 04-02, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:rwp04-02
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial markets;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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