Synamic banking: a reconsideration

Financially intermediated and stock market consumption-investmentallocations, with and without governmental interventions, arecompared in a welfare sense in overlapping generation economieswith (and without) shocks to agents' intertemporal preferences.We first show that, in economies with preference shocks, governmentalinterventions subject to the same information requirements asthose imposed on financial intermediaries, lead to stock marketallocations that are not inferior to those attained under financialintermediation. Second, we argue that the necessary interventionsare qualitatively no different from those required to implementstationary optimal allocations in OLG models without shocksto agents' intertemporal consumption preferences.