Financial intermediation in an overlapping generations model with transaction costs |
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| Affiliation: | 1. Department of Finance, University College of Financial Studies (CUNEF), c/Leonardo Prieto Castro, 2, 28040 Madrid, Spain;2. Department of Economics and Business, CEU Cardenal Herrera University, Plaza Reyes Católicos, 19, 03204 Elche (Alicante), Spain;3. Department of Business Administration, University Carlos III, c/Madrid, 126, 28903 Getafe (Madrid), Spain;1. School of Electrical and Automation Engineering, East China Jiaotong University, Nanchang 330013, China;2. Department of Electrical and Electronics Engineering, Faculty of Technology, Sakarya University of Applied Sciences, Serdivan, Sakarya 54187, Turkey;3. Laboratory of Automation and Applied Computer, Department of Electrical Engineering, University of Dschang, P. O. Box 134, Bandjoun, Cameroon;2. School of Business, Garden City University College, Ghana |
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| Abstract: | We analyze an overlapping generations economy where agents interact to share liquidity risk. We show that a pure exchange economy has excessive trade in equilibrium because agents interact to rebalance their portfolios. Intergenerational financial intermediaries reduce the number of interactions because agents only transact when they face liquidity needs. In the absence of asset risk, intermediaries match redemptions with deposits and dividends, and never sell assets. If the economy is subject to transaction costs, the intermediated economy can sustain higher stationary investment and welfare. We also find that dead weight transaction costs can increase welfare because it protects banks from interbank arbitrage and dampens the inherent cyclicality of market economies. |
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| Keywords: | Financial intermediation Overlapping generations Transaction costs |
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