Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/315867 
Year of Publication: 
2024
Citation: 
[Journal:] Economic Theory Bulletin [ISSN:] 2196-1093 [Volume:] 12 [Issue:] 1 [Publisher:] Springer International Publishing [Place:] Cham [Year:] 2024 [Pages:] 57-78
Publisher: 
Springer International Publishing, Cham
Abstract: 
Abstract This article investigates a two-period lived overlapping-generations (OLG) model that incorporates financial intermediation. A risk-neutral bank offers loan and deposit contracts that insure risk-averse agents against idiosyncratic income shocks. Agents prefer financial intermediation to capital markets if it provides efficient risk sharing. The analysis demonstrates that in any two-period lived OLG model in which productive capital is increasing in investment levels, financial intermediation, when implemented for the purpose of efficient risk sharing, cannot instigate business cycles or complex dynamics. The resulting dynamics is monotonic and qualitatively indistinguishable from the dynamics of the classical OLG model by Diamond (Am Econ Rev 55(5):1126–1150, 1965). Business cycles may only occur if banks offer inefficient contracts. Efficient contracts will, in general, not induce dynamically efficient growth paths.
Subjects: 
Financial intermediation
Overlapping generations
Risk sharing
Business cycles
Loan contracts
Persistent Identifier of the first edition: 
Additional Information: 
D53;E32;E44;G21;O41
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version
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