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Financial market participation, financial intermediation, and monetary policy

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  • Ghossoub, Edgar A.

Abstract

It is not uncommon for the Friedman rule to be optimal in neoclassical models with money. Notably, previous studies also find that financial intermediation is not welfare improving when money is costless to hold. This paper departs from previous studies by highlighting the importance of participation costs in financial markets for the participation in financial intermediation and monetary policy. As in previous work, the Friedman rule is optimal. However, I demonstrate that the welfare gains from disinflation are much higher when savings are intermediated if direct participation costs in financial markets are significant. Consequently, financial intermediation can still be optimal at the Friedman rule.

Suggested Citation

  • Ghossoub, Edgar A., 2012. "Financial market participation, financial intermediation, and monetary policy," Economics Letters, Elsevier, vol. 117(1), pages 127-130.
    • Handle: RePEc:eee:ecolet:v:117:y:2012:i:1:p:127-130
    DOI: 10.1016/j.econlet.2012.04.090
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    References listed on IDEAS

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    1. Chari, V. V. & Christiano, Lawrence J. & Kehoe, Patrick J., 1996. "Optimality of the Friedman rule in economies with distorting taxes," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 203-223, April.
    2. Huybens, Elisabeth & Smith, Bruce D., 1999. "Inflation, financial markets and long-run real activity," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 283-315, April.
    3. Valerie R. Bencivenga & Bruce Smith, 2003. "Monetary policy and financial market evolution," Review, Federal Reserve Bank of St. Louis, vol. 85(Jul), pages 7-26.
    4. Schreft, Stacey L. & Smith, Bruce D., 1997. "Money, Banking, and Capital Formation," Journal of Economic Theory, Elsevier, vol. 73(1), pages 157-182, March.
    5. Robert M. Townsend, 1978. "Intermediation with Costly Bilateral Exchange," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(3), pages 417-425.
    6. Ireland, Peter N, 1996. "The Role of Countercyclical Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 704-723, August.
    7. Bruce Smith, 2003. "Taking intermediation seriously," Proceedings, Federal Reserve Bank of Cleveland, pages 1319-1377.
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    More about this item

    Keywords

    Monetary policy; Financial intermediation; Friedman rule;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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