Financial Intermediaries and Transaction Costs
28 Pages Posted: 19 Feb 2009
Date Written: February 15, 2009
Abstract
We present an overlapping generations model with spatial separation and agents who face liquidity risk to investigate the widely held belief that financial intermediaries exist because they save on transaction costs. We find that if agents only use a pure exchange mechanism, they engage in active portfolio duration rebalancing even when they do not need to consume. An intergenerational financial intermediary reduces the number of rebalancing transactions by catering to a diversified its client base. Our model also shows transaction costs can dampen cyclicality in exchange economies, and that intermediated economies are less cyclical still.
Keywords: Financial Intermediation, Overlapping Generations, Liquidity
JEL Classification: D91, G21, E43
Suggested Citation: Suggested Citation
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