Costly Intermediation and the Big Push

FRB Atlanta Working Paper No. 98-16

Posted: 6 Nov 1998

See all articles by Zsolt Becsi

Zsolt Becsi

Southern Illinois University - Department of Economics

Ping Wang

Washington University in St. Louis - Department of Economics; National Bureau of Economic Research (NBER)

Mark A. Wynne

Federal Reserve Bank of Dallas

Date Written: August 1998

Abstract

Many existing theories of financial intermediation have difficulty explaining why financial activity can generate large real effects. This paper argues that the large real effects may reflect a multiplicity of equilibria. The multiple equilibria in this paper are generated by the dynamic interactions between the savings decisions of workers and the monopolistically competitive behavior of banks. We characterize the equilibria by showing the comparative-static responses of key aggregates to changes in the pure rate of time preference, investment uncertainty, and bank costs. We find that the results depend crucially on the intertemporal elasticity of labor supply and the aggregate level of employment. Small changes in the financial system may cause the economy to shift between low- and high-employment equilibria. The high-employment, high real interest rate equilibrium is consistent with the development experience of Japan, Korea, and Taiwan with repressed financial systems.

JEL Classification: E44, O41

Suggested Citation

Becsi, Zsolt and Wang, Ping and Wynne, Mark A., Costly Intermediation and the Big Push (August 1998). FRB Atlanta Working Paper No. 98-16, Available at SSRN: https://ssrn.com/abstract=119690

Zsolt Becsi (Contact Author)

Southern Illinois University - Department of Economics ( email )

MC 4515
Carbondale, IL 62901
United States

Ping Wang

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mark A. Wynne

Federal Reserve Bank of Dallas ( email )

PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5159 (Phone)
214-922-5194 (Fax)

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