Macroeconomic Evolution after a ProductionShock: the Role for Financial Intermediation

Financial intermediaries may increase economic efficiency through intertemporal risk smoothing.However without an adequate regulation, intermediation may fail to do this. This paper studiesthe effects of a production shock in a closed economy and compares abilities of market-based andbank-based financial systems in processing the shock. Unregulated banking system may collapsein absence of a proper regulation. The paper studies several types of regulatory interventions,which may improve the performance of the banking system....