Hostname: page-component-cd9895bd7-lnqnp Total loading time: 0 Render date: 2024-12-23T06:58:44.306Z Has data issue: false hasContentIssue false
  • English
  • Français

UNBUNDLING FINANCIAL IMPERFECTIONS: LENDING FRICTIONS VS. TRADING FRICTIONS

Published online by Cambridge University Press:  06 June 2017

Burak R. Uras
Burak R. Uras*
Affiliation:
Tilburg University
*
Address correspondence to: Department of Economics, Tilburg University, Room K322B, 5000 LE Tilburg, The Netherlands; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

Two essential imperfections determine the degree of the financial sector development in an economy: lending frictions, which constrain the ability to extend loans to borrowers; and, trading frictions, which constrain the trading of these loans in secondary markets. I develop a dynamic general equilibrium model where long-term investment is the engine of growth to study macroeconomic consequences of financial development. In the model, long-term loans are extended to entrepreneurs in a primary market and then traded in a secondary market among financiers. In competitive equilibria, reductions in either lending or trading frictions enlarge the financial sector. Although financial deepening through low-cost lending is always welfare improving, financial deepening stimulated by low-cost trading could be detrimental to the society. I illustrate that a model qualitatively consistent with the U.S. financial development episode of the last 30 years should exhibit disproportionately large reductions in trading frictions relative to lending frictions.

Keywords

Long-Term InvestmentSecondary MarketsFinancial Frictions
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 4 , June 2019 , pp. 1401 - 1441
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

For their suggestions and comments I would like to thank Thorsten Beck, Ata Can Bertay, Harry Huizinga, Manuel Oechslin, Gonzague Vannoorenberghe, Wolf Wagner, and Ping Wang; conference participants at 2012 Midwest Economic Theory Meetings, 2013 Society for Advanced Economic Theory Conference, 2013 Tilburg Development Economics Workshop; and seminar participants at Goethe University and Tilburg University.

References

REFERENCES

Acemoglu, D. and Johnson, S. (2005) Unbundling Institutions. Journal of Political Economy 113 (5), 949–995.Google Scholar
Aghion, P., Angeletos, G.-M., Banerjee, A., and Manova, K. (2010) Volatility and growth: Credit constraints and composition of investment. Journal of Monetary Economics 57 (3), 246–265.Google Scholar
Aiyagari, S. R. (1994) Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109 (3), 659–684.Google Scholar
Angeletos, G. M. and Calvet, L. E. (2007) Idiosyncratic production risk, growth and the business cycle. Journal of Monetary Economics 53 (6), 1095–1115.Google Scholar
Antunes, A., Cavalcanti, T., and Villamil, A. (2008) The effect of financial repression and enforcement on entrepreneurship and economic development. Journal of Monetary Economics 55 (2), 278–297.Google Scholar
Arcand, J. L., Berkes, E., and Panizza, U. (2015) Too much finance? Journal of Economic Growth 20 (2), 105–148.Google Scholar
Arestis, P., Demetriades, P. O., and Luintel, K. B. (2001) Financial development and economic growth: The role of stock markets. Journal of Money, Credit and Banking 33 (1), 16–41.Google Scholar
Banerjee, A. and Newman, A. (1993) Occupational choice and process of development. Journal of Political Economy 101 (2), 274–298.Google Scholar
Beck, T., Degryse, H., and Kneer, C. (2014) Is more finance better? Disentangling intermediation and size effects of financial systems. Journal of Financial Stability 10, 50–64.Google Scholar
Beck, T. and Levine, R. (2002) Industry growth and capital allocation: Does having a market- or bank-based system matter? Journal of Financial Economics 64 (2), 147–180.Google Scholar
Beck, T. and Levine, R. (2004) Stock markets, banks, and growth: Panel evidence. Journal of Banking and Finance 28 (3), 423–442.Google Scholar
Beck, T., Levine, R., and Loayza, N. (2000) Financial intermediation and growth: Causality and causes. Journal of Monetary Economics 46 (1), 31–77.Google Scholar
Bencivenga, V. and Smith, B. (1991) Financial intermediation and endogenous growth. Review of Economic Studies 58 (2), 195–209.Google Scholar
Bencivenga, V., Smith, B., and Starr, R. M. (1995) Transactions costs, technological change and endogenous growth. Journal of Economic Theory 67 (1), 153–177.Google Scholar
Bencivenga, V., Smith, B., and Starr, R. M. (1996) Liquidity of secondary markets: Allocative efficiency and the maturity composition of the capital stock. Economic Theory 7 (1), 19–50.Google Scholar
Bencivenga, V., Smith, B., and Starr, R. M. (2000) Secondary capital markets, long-run growth, and the term structure of asset yields. International Economic Review 41 (3), 769–800.Google Scholar
Bolton, P., Santos, T., and Scheinkman, J. A. (2016) Cream skimming in financial markets. Journal of Finance 71 (2), 709–736.Google Scholar
Cecchetti, G. and Kharroubi, E. (2012) Reassessing the Impact of Finance on Growth. BIS working paper 381.Google Scholar
Demirguc-Kunt, A. and Huizinga, H. (1999) Determinants of commercial bank interest margins and profitability: Some international evidence. World Bank Economic Review 13 (2), 379–408.Google Scholar
Demirguc-Kunt, A., Leaven, L., and Levine, R. (2004) Regulations, market structure, institutions, and the cost of financial intermediation. Journal of Money, Credit and Banking 36 (3), 593–622.Google Scholar
Diamond, P. A. (1965) National debt in a neoclassical growth model. American Economic Review 55 (5), 1126–1150.Google Scholar
Ergungor, O. E. (2008) Financial system structure and economic growth: Structure matters. International Review of Economics and Finance 17 (2), 292–305.Google Scholar
Greenwood, J. and Jovanovic, B. (1990) Financial development, growth, and the distribution of income. Journal of Political Economy 98 (5), 1076–1107.Google Scholar
Gennaioli, N., Shleifer, A., and Vishny, R. (2012) Neglected risks, financial innovation, and financial fragility. Journal of Financial Economics 104 (3), 452–468.Google Scholar
Huang, H. C. and Lin, S. C. (2009) Non-linear finance-growth nexus. Economics of Transition 17, 439–466.Google Scholar
King, G. R. and Levine, R. (1993) Finance and growth: Schumpeter might be right. Quarterly Journal of Economics 108 (3), 717–737.Google Scholar
Law, S. H. and Singh, N. (2014) Does too much finance harm economic growth? Journal of Banking and Finance 41, 36–44.Google Scholar
Levine, R. (1993) Finance and growth: Schumpeter might be right. Quarterly Journal of Economics 108 (3), 717–737.Google Scholar
Levine, R. (1997) Financial development and economic growth: Views and agenda. Journal of Economic Literature 35 (2), 688–726.Google Scholar
Levine, R. (2005) Finance and growth: Theory and evidence. In Aghion, P. and Durlauf, S. (eds.), Handbook of Economic Growth, vol. 1, pp. 865–934. Elsevier.Google Scholar
Levine, R. and Zervos, S. (1998) Stock markets, banks and economic growth. American Economic Review 88 (3), 537–558.Google Scholar
Pagano, M. and Jappelli, T. (1994) Saving, growth and liquidity constraints. Quarterly Journal of Economics 109 (1), 83–109.Google Scholar
Philippon, T. (2010) Financiers versus engineers: Should the financial sector be taxed or subsidized? American Economic Journal: Macroeconomics 2 (3), 158–82.Google Scholar
Philippon, T. (2015) Has the US finance industry become less efficient? On the theory and measurement of financial intermediation. American Economic Review 105 (4), 1408–1438.Google Scholar
Philippon, T. and Reshef, A. (2012) Wages and human capital in the US finance industry: 1909–2006. Quarterly Journal of Economics 127 (4), 1551–1609.Google Scholar
Rajan, R. G. (2005) Has Financial Development Made the World Riskier? National Bureau of Economic Research working paper w11728.Google Scholar
Rajan, R. and Zingales, L. (1998) Financial dependence and growth. American Economic Review 88 (3), 559–586.Google Scholar
Shen, C. H. and Lee, C. C. (2006) Same financial development yet different economic growth why? Journal of Money, Credit and Banking 38 (7), 1907–1944.Google Scholar
Zingales, L. (2015) Presidential address: Does finance benefit society? Journal of Finance 70 (4), 1327–1363.Google Scholar