Excessive Financial Intermediation in a Model with Endogenous Liquidity

Does an unregulated financial system absorb too many productive inputs? This paper studies this question in the context of a dynamic model with heterogeneous producers. In the absence of a financial system, the only way to purchase inputs is using internal funds. Producers are subject to idiosyncratic productivity shocks, and will decide to produce only if their productivity is high enough. Otherwise, they will hold money. A financial intermediation technology allows producers to purchase inputs in excess of their internal funds, by borrowing from unproductive agents. However, intermediation requires the use of costly monitoring services. In equilibrium, intermediation increases the money in circulation and raises nominal prices, thereby reducing the value of internal funds and making producers increasingly reliant on costly monitoring services. For this reason, society is better off when intermediation is restricted.

Bibliographic Details

Main Author:	Eden, Maya
Format:	Policy Research Working Paper biblioteca
Language:	English
Published:	World Bank, Washington, DC 2012-05
Subjects:	AGGREGATE SUPPLY, ALLOCATION OF CAPITAL, ALLOCATION OF RESOURCES, AMOUNT OF CAPITAL, ARBITRAGE, ARBITRAGE OPPORTUNITY, ASSET PRICE, BAILOUTS, BANKING INDUSTRY, BENCHMARK, BIDS, BINDING CONSTRAINT, BORROWING, BUDGET CONSTRAINT, CAPITAL ACCUMULATION, CAPITAL ALLOCATION, CAPITAL COSTS, CAPITAL MARKET, CAPITAL PURCHASE, CAPITAL PURCHASES, CAPITAL STOCK, COLLATERAL, COMMERCIAL BANKS, CONSUMERS, CONSUMPTION SMOOTHING, COORDINATION FAILURE, COUNTERFEIT MONEY, DEBT, DEMAND FOR CAPITAL, DEMAND FOR SAVINGS, DERIVATIVE, DEVELOPMENT ECONOMICS, DEVELOPMENT POLICY, DISTRIBUTIONAL IMPLICATIONS, ECONOMIC DEVELOPMENT, ECONOMIC EFFICIENCY, ECONOMIC GROWTH, ECONOMIC THEORY, ECONOMICS RESEARCH, EFFICIENT ALLOCATION, EMERGING MARKET, ENDOWMENTS, ENTREPRENEURS, EQUILIBRIUM, EQUILIBRIUM PRICES, EXPECTED RETURNS, EXTERNAL FUNDS, EXTERNALITIES, FEDERAL RESERVE, FEDERAL RESERVE BANK, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL EXPERTISE, FINANCIAL FRAGILITY, FINANCIAL INSTRUMENTS, FINANCIAL INTERMEDIATION, FINANCIAL MARKETS, FINANCIAL REGULATION, FINANCIAL SECTOR, FINANCIAL SERVICES, FINANCIAL SHOCK, FINANCIAL SYSTEM, FIXED COST, FULL EMPLOYMENT, GDP, GROWTH THEORY, HOLDING, HOLDINGS, HOUSEHOLD WEALTH, IMPLICIT SUBSIDY, INCOME, INCOME SHOCKS, INDUSTRIAL LOANS, INEFFICIENCY, INEQUALITY, INFLATION, INPUT PRICES, INSURANCE, INTERNAL FUNDS, INTERNATIONAL BANK, LENDER, LENDERS, LEVIES, LIQUIDITY, LIQUIDITY CONSTRAINT, LIQUIDITY CONSTRAINTS, LOAN, LOAN SIZE, LOANABLE FUNDS, M1, MACROECONOMIC MODELS, MACROECONOMICS, MARGINAL COST, MARGINAL COSTS, MARGINAL UTILITY, MARKET FAILURES, MARKET PRICE, MATHEMATICAL ECONOMICS, MAXIMUM AMOUNT, MICRO STRUCTURE, MONETARY EQUILIBRIUM, MONEY SUPPLIES, MONEY SUPPLY, MONITORING COST, MORAL HAZARD, MORAL HAZARD PROBLEM, OPTIMIZATION, PARTIAL EQUILIBRIUM ANALYSIS, PHYSICAL CAPITAL, POLITICAL ECONOMY, PORTFOLIO, PRICE LEVEL, PRODUCTION INPUTS, PRODUCTION OUTPUT, PRODUCTIVE INVESTMENT, PRODUCTIVE RESOURCES, PRODUCTIVE USE, PRODUCTIVITY, PROFITABILITY, RATE OF RETURN, REAL INCOME, RESERVE, RESERVE RATIO, RESERVE REQUIREMENT, RESERVE REQUIREMENTS, RESERVES, RETURN, SALES REVENUES, SAVINGS, SELF-FINANCE, SELF-FINANCING, SOCIAL WELFARE, STRUCTURAL CHANGE, TITHE, TRANSITION ECONOMIES, USE OF DERIVATIVES, UTILITY FUNCTION, VALUE ADDED, VALUE OF MONEY, WEALTH,
Online Access:	http://documents.worldbank.org/curated/en/2012/05/16255088/excessive-financial-intermediation-model-endogenous-liquidity http://hdl.handle.net/10986/9358
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