Working Paper
Investigating output cycles under two alternative financial systems
Abstract: Different financial systems vary in the way they contribute to the process of resource allocation in the economy and in the risk-sharing pattern that they bring about. It would therefore be plausible to expect different financial systems to differ in the way they affect real economic activity. I hereby provide a theoretic framework for the comparison and analysis of output cycles under two alternative financial systems: an equity-based financial system (EFS), in which a mutual fund functions as a financial intermediary, versus a debt-based financial system (DFS), in which a bank plays that role. The research points that DFS generates larger output cycles and a higher expected output than EFS. The mechanism that generates these results is the counter-cyclical effect of savings' behavior under EFS.
Keywords: Financial markets; Financial services industry;
Authors
Bibliographic Information
Provider: Federal Reserve Bank of St. Louis
Part of Series: Supervisory Policy Analysis Working Papers
Publication Date: 2007
Number: 2007-04