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Loanable Funds, Monitoring and Banking

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  • Huberto M. Ennis

Abstract

This paper studies financial intermediation in a general equilibrium overlapping generations model. Indivisible investment projects combine with informational imperfections to create a (hidden action) moral hazard problem and introduce a role for third-party monitoring. Agency costs at the intermediary level are also considered. Under some conditions, monitors can be viewed as banks facing a non-trivial portfolio diversification problem. Equilibria are derived in which a large national bank coexists with a number of regional banks, a structure of strong empirical relevance. Policies such as a mandatory reserve requirement are shown to have substantial effects on the levels of investment in the economy.

Suggested Citation

  • Huberto M. Ennis, 2000. "Loanable Funds, Monitoring and Banking," Center for Financial Institutions Working Papers 00-21, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:00-21
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    File URL: http://fic.wharton.upenn.edu/fic/papers/00/0021.pdf
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    Cited by:

    1. Huberto M. Ennis, 2001. "On the size distribution of banks," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-25.
    2. Al-Jarhi, Mabid, 2004. "The Philosophy of Islamic Banking and Finance," MPRA Paper 66739, University Library of Munich, Germany, revised 2007.
    3. Huberto M. Ennis, 2000. "Banking and the political support for dollarization," Working Paper 00-12, Federal Reserve Bank of Richmond.
    4. Miyake, Atsushi & Nakamura, Tamotsu, 2007. "A dynamic analysis of an economy with banking optimization and capital adequacy regulations," Journal of Economics and Business, Elsevier, vol. 59(1), pages 14-27.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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