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Excessive Financial Intermediation in a Model with Endogenous Liquidity / Maya Eden
World Bank Open Knowledge Repository (formerly "World Bank E-Library Publications") Available online
View online- Format:
- Book
- Government document
- Author/Creator:
- Eden, Maya
- Series:
- Policy research working papers.
- World Bank e-Library.
- Language:
- English
- Subjects (All):
- Access to Finance.
- Costs of the financial sector.
- Debt Markets.
- Economic Theory & Research.
- Finance and Financial Sector Development.
- Financial intermediation.
- Financial regulation.
- Fiscal & Monetary Policy.
- Islamic Finance.
- Liquidity.
- Macroeconomics and Economic Growth.
- Local Subjects:
- Access to Finance.
- Costs of the financial sector.
- Debt Markets.
- Economic Theory & Research.
- Finance and Financial Sector Development.
- Financial intermediation.
- Financial regulation.
- Fiscal & Monetary Policy.
- Islamic Finance.
- Liquidity.
- Macroeconomics and Economic Growth.
- Physical Description:
- 1 online resource (61 pages)
- Place of Publication:
- Washington, D.C., The World Bank, 2012
- System Details:
- data file
- Summary:
- 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.
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