Journal or Book Title
Journal of Economic Dynamics and Control
First Page or Article ID Number
This paper studies the possibility of endogenous fluctuations caused by activities of financial intermediaries. Risk-averse agents borrow from banks and invest in a risky two-state capital technology. The probability of success with the technology is assumed to be decreasing in the amount of capital invested. In a complete information setting with intermediation, the efficient loan contract achieves complete risk sharing but the amount invested in the risky project is smaller than the loan size. This “income effect” is responsible for the endogenous generation of complex dynamics. In the absence of intermediation, the economy studied cannot exhibit any cyclical fluctuations.
E32, E21, E44, G2
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This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Banerji, Sanjay; Bhattacharya, Joydeep; and Long, Ngo Van, "Can financial intermediation induce endogenous fluctuations" (2004). Economics Publications. 819.