Costs and Benefits of the Financial Sector
The financial sector allows a better allocation of capital compared to autarchy, increasing the aggregate technology and thus the income growth rate of the economy. At the same time, however, it also amplifies the business cycles through the financial accelerator which increases the volatility of income. In this paper we first present a general equilibrium model which captures both effects of the financial sector. We then parametrize the model to analyze the quantitative effects of policies aimed at reducing the income volatility caused by the financial system. Finally, we study whether limiting the size of the financial sector is welfare enhancing in the context of this model.
Year of publication: |
2011
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Authors: | Teignier, Marc ; Rivadeneyra, Francisco ; Pinheiro, Tiago |
Institutions: | Society for Economic Dynamics - SED |
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