The Development and Structure of Financial Systems
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Date
2003-11-01
Authors
Chakraborty, Shankha
Ray, Tridip
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept. of Economics
Abstract
We introduce monitored bank loans and non-monitored tradeable securities as sources of external finance for firms in a dynamic general equilibrium model. Due to frictions arising from moral hazard, access to credit and each type of financial instrument are determined by the wealth distribution. We study the depth of credit markets (financial development) and conditions under which the financial system relies more on either type of external finance (financial structure). We identify initial inequality, investment size and institutional factors as key determinants of financial development, while an economy’s financial structure is shaped by its investment technology and legal and financial institutions. The model’s predictions are consistent with historical and recent development experience.
Description
44 p.
Keywords
Financial development, Financial structure, Bank finance, Market finance, Credit frictions