Reference : Financial intermediation in a noverlapping generations model with transaction costs
Scientific journals : Article
Business & economic sciences : Finance
Financial intermediation in a noverlapping generations model with transaction costs
Van Bommel, Jos mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Luxembourg School of Finance (LSF) >]
Hasman, Augusto [> >]
Samartín, Margarita [> >]
Journal of Economic Dynamics and Control
Yes (verified by ORBilu)
[en] We analyze an overlapping generations economy where agents interact to share liquidity risk. We show that a pure exchange economy has excessive trade in equilibrium because agents interact to rebalance their portfolios. Intergenerational financial intermediaries reduce the number of interactions because agents only transact when they face liquidity needs. In the absence of asset risk, intermediaries match redemptions with deposits and dividends, and never sell assets. If the economy is subject to transaction costs, the intermediated economy can sustain higher stationary investment and welfare. We also find that dead weight transaction costs can increase welfare because it protects banks from interbank arbitrage and dampens the inherent cyclicality of market economies.

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