Financial Intermediaries, Markets, and Growth


  • We thank two anonymous referees, Jerry Hanweck, Paula Hernandez-Verme, Frederick Joutz, Todd Keister, Steve Williamson, as well as seminar participants at University of Missouri, Texas A&M, UNC Chapel Hill, UC Irvine, UQAM, University of Montreal, Emory University, St. Louis Fed, the BIS, the 2004 Missouri Economic Conference, the 2004 WAFA/FDIC Conference, the 2004 Midwest Macro Meeting, the 2004 Clarence Tow Conference, the 2004 North American Summer Meeting of the Econometric Society, the 2004 Annual Meeting of the Society for Economic Dynamics, the 2004 European Economic Association Meeting, and the 2005 SAET conference for useful comments. We also thank Mike Demott for editorial assistance. All remaining errors are our own. The views expressed here are those of the authors and not necessarily those of the Deutsche Bundesbank, the Federal Reserve Bank of New York, or the Federal Reserve System.


We build a model in which financial intermediaries provide insurance to households against idiosyncratic liquidity shocks. Households can invest in financial markets directly if they pay a cost. In equilibrium, the ability of intermediaries to share risk is constrained by the market. From a growth perspective, this can be beneficial because intermediaries invest less in the productive technology when they provide more risk-sharing. Our model predicts that bank-oriented economies can grow more slowly than more market-oriented economies, which is consistent with some recent empirical evidence.