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ON THE WELFARE AND DISTRIBUTIONAL IMPLICATIONS OF INTERMEDIATION COSTS

This paper studies the distributional implications of intermediation costs. We built a "Bewley" model economy where individuals experience uninsurable idiosyncratic shocks on labor productivity and financial intermediation is costly. Individuals smooth consumption by making deposits to a financial intermediary in good times and by running down credit balances or getting loans in bad times. Higher intermediation costs (IC) increase the costs for individuals to insure against idiosyncratic shocks and to smooth consumption over time. When IC increase by a factor of 10 from its baseline value of 4% (US case), aggregate welfare decreases by less than 1% of the average consumption. For those at the bottom 1% of the wealth distribution the welfare costs are roughly 41% of their consumption, while for those at the top 1% it is -0.17%.
Year of publication:
2005
Authors: Cavalcanti, Tiago V. de V. ; Villamil, Anne P.
Institutions: Associação dos Centros de Pós-Graduação em Economia - ANPEC
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Type of publication: Book / Working Paper
Language: English
Classification: E60 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook. General ; G38 - Government Policy and Regulation ; O11 - Macroeconomic Analyses of Economic Development
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Persistent link: https://www.econbiz.de/10004968519
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