Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/19511 
Year of Publication: 
2005
Series/Report no.: 
Discussion Paper Series 1 No. 2005,03
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
We build a model in which 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. Our model predicts that bank-oriented economies should grow slower than more market-oriented economies, which is consistent with some recent empirical evidence. We show that the mix of intermediaries and market that maximizes welfare under a given level of financial development depends on economic fundamentals. We also show the optimal mix of two structurally very similar economies can be very different.
Subjects: 
Financial Intermediaries
Risk Sharing
Finance and Growth
Comparing Financial Systems
JEL: 
E44
G20
G10
Document Type: 
Working Paper

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