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 idiosyncrat...

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Main Author:	Eden, Maya
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
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

id	okr-10986-9358
recordtype	oai_dc
spelling	okr-10986-93582021-04-23T14:02:44Z Excessive Financial Intermediation in a Model with Endogenous Liquidity Eden, Maya 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 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. 2012-06-29T22:16:34Z 2012-06-29T22:16:34Z 2012-05 http://documents.worldbank.org/curated/en/2012/05/16255088/excessive-financial-intermediation-model-endogenous-liquidity http://hdl.handle.net/10986/9358 English Policy Research Working Paper; No. 6059 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	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
spellingShingle	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 Eden, Maya Excessive Financial Intermediation in a Model with Endogenous Liquidity
relation	Policy Research Working Paper; No. 6059
description	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.
format	Publications & Research :: Policy Research Working Paper
author	Eden, Maya
author_facet	Eden, Maya
author_sort	Eden, Maya
title	Excessive Financial Intermediation in a Model with Endogenous Liquidity
title_short	Excessive Financial Intermediation in a Model with Endogenous Liquidity
title_full	Excessive Financial Intermediation in a Model with Endogenous Liquidity
title_fullStr	Excessive Financial Intermediation in a Model with Endogenous Liquidity
title_full_unstemmed	Excessive Financial Intermediation in a Model with Endogenous Liquidity
title_sort	excessive financial intermediation in a model with endogenous liquidity
publisher	World Bank, Washington, DC
publishDate	2012
url	http://documents.worldbank.org/curated/en/2012/05/16255088/excessive-financial-intermediation-model-endogenous-liquidity http://hdl.handle.net/10986/9358
_version_	1764409262535081984

Excessive Financial Intermediation in a Model with Endogenous Liquidity

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