Campus Units

Economics

Document Type

Article

Publication Version

Accepted Manuscript

Publication Date

10-2004

Journal or Book Title

Journal of Economic Dynamics and Control

Volume

28

Issue

11

First Page or Article ID Number

2215

Last Page

2238

DOI

10.1016/j.jedc.2003.10.002

Abstract

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.

JEL Classification

E32, E21, E44, G2

Comments

This is a manuscript of an article published as Banerji, Sanjay, Joydeep Bhattacharya, and Ngo Van Long. "Can financial intermediation induce endogenous fluctuations." Journal of Economic Dynamics and Control 28, no. 11 (2004): 2215-2238. doi:10.1016/j.jedc.2003.10.002. Posted with permission.

Copyright Owner

Elsevier B.V.

Language

en

File Format

application/pdf

Published Version

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