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We propose a parsimonious model of bilateral trade under asymmetric information to shed light on the prevalence of intermediation chains that stand between buyers and sellers in many decentralized markets. Our model features a classic problem in economics where an agent uses his market power to inefficiently screen a privately informed counterparty. Paradoxically, involving moderately informed intermediaries also endowed with market power can improve trade efficiency. Long intermediation chains in which each trader's information set is similar to those of his direct counterparties limit traders' incentives to post prices that reduce trade volume and jeopardize gains to trade. (JEL D42, D82, D85, L12, L14) [ABSTRACT FROM AUTHOR]

A quantitative investigation of financial intermediation in the United States over the past 130 years yields the following results: (i) the finance industry's share of gross domestic product (GDP) is high in the 1920s, low in the 1960s, and high again after 1980; (ii) most of these variations can be explained by corresponding changes in the quantity of intermediated assets (equity, household and corporate debt, liquidity); (iii) intermediation has constant returns to scale and an annual cost of 1.5-2 percent of intermediated assets; (iv) secular changes in the characteristics of firms and households are quantitatively important. (JEL D24, E44, G21, G32, N22) [ABSTRACT FROM AUTHOR]

A model of public and private liquidity integrates financial intermediation theory with a New Monetarist monetary framework. Non-passive fiscal policy and costs of operating a currency system imply that an optimal policy deviates from the Friedman rule. A liquidity trap can exist in equilibrium away from the Friedman rule, and there exists a permanent nonneutrality of money, driven by an illiquidity effect. Financial frictions can produce a financial-crisis phenomenon that can be mitigated by conventional open market operations working in an unconventional manner. Private asset purchases by the central bank are either irrelevant or they reallocate credit and redistribute income. (JEL E13, E44, E52, E62, G01) [ABSTRACT FROM AUTHOR]

To address how technological progress in financial intermediation affects the economy, a costly-state verification framework is embedded into the standard growth model. The framework has two novel ingredients. First, firms differ in the risk/return combinations that they offer. Second, the efficacy of monitoring depends upon the amount of resources invested in the activity. A financial theory of firm size results. Undeserving firms are over-financed, deserving ones under-funded. Technological advance in intermediation leads to more capital accumulation and a redirection of funds away from unproductive firms toward productive ones. With continued progress, the economy approaches its first-best equilibrium. ( JEL G21, G31, O16, O33, O41) [ABSTRACT FROM AUTHOR]

The article discusses the nature of liquidity and the importance of financial intermediaries in a financial system that is built around capital markets. The role played by monetary policy in regulating credit supply is explored. The financial crisis has led to the withering of credit which was plentiful before the crisis. Since the financial crisis, market-based institutions have replaced banks as the dominant suppliers of credit. Residential mortgage lending has also been overtaken by market-based holdings. The market-based intermediaries and the lessons for monetary policy are discussed.

This article assesses the advantages of financial intermediation without exclusivity. The authors assumed that each intermediary offers a single contract. Intermediaries may want to offer contracts that are not necessary to implement the equilibrium, but which deter entrants, as in the insurance model of Alberto Bisin and Danilo Guaitoli. These contracts are present principally as threats to a potential entrant. However, in equilibrium, if there are costs of maintaining each contract, those contracts that are not needed to implement the equilibrium allocation would not be offered, and the analysis in this paper can accommodate intermediaries that issue multiple contracts.

Economic decisions are goal-seeking choices made under acknowledged constraints. Monetary policy and deposit-institution regulation promote three major economic goals: fostering financial stability; contributing to good macroeconomic performance; and securing efficient patterns of financial intermediation. Analogue of market constraints lies in limits imposed on the effective exercise of its statutory tools by market adaptation to theft exercise. This adaptation attempts to minimize the net regulatory burdens that agency activities place on regulated institutions and theft customers. Into their conceptions of how policy instruments work, authorities need to incorporate the dialectical economic and political responses of regulatees and their less-regulated competitors. Until the concept of regulation-induced innovation begins to play a major role in policymakers' analysis of the effects of alternative forms of innovation induced re-regulation, the possibility of financial instability remains a serious threat.

The article explores the microeconomic theory of financial intermediation in an open economy. International financial intermediation can be defined to include three main types of transactions: financial transactions of a bank with nonresidents denominated in the currency of the country in which the bank is resident; financial transactions of a bank with nonresidents denominated in currencies other than the currency of the country in which the bank is resident; and financial transactions of a bank with residents denominated in foreign currencies. The comparison of international financial intermediation with domestic financial intermediation is of greater analytical interest. In recent years there have been a number of studies that have modeled the financial intermediary as a firm maximizing some form of objective function.

Various arguments have been presented in favor of government issuing linked bonds. A well-known argument is that in inflationary periods the government should enable the "small investor" to maintain the real value of his savings. Another argument, which has been made recently, is that the stock of government indexed bonds issued will reduce the government's incentive to use inflation as a tax. The author concentrates on a class of arguments which stress one major aspect of the problem: that by issuing indexed bonds the government reduces the inflation risk faced by the economic agents. It has been argued that the introduction of a risk-free asset enlarges the feasible set of the private investor and enables him to achieve a better diversification of his portfolio. In addition to this direct contribution to the welfare it is argued that the existence of linked bonds encourages savings under inflationary conditions and reduces the tendency to make excessive investments in real estate and other physical assets.

This article presents reply by the author in response to the comment made by scholar Houston Stokes regarding speculation and arbitrage. The author says Houston's comment on his paper seems to be based on a misinterpretation of a passage of his 1959 article, which perhaps calls for further clarification. He asserts that the author said somewhere in his paper that "the return to spot speculation was equal to the return to forward speculation plus the return to interest arbitrage," but he does not bother to point out where the author is supposed to have said this. Searching through that article, which the author wrote fourteen years ago, however, he could not find any sentence to that effect. A speculator who speculates on the spot exchange market may, in fact, be regarded as acting implicitly in the combined capacity of an interest arbitrager and a forward exchange speculator. If he speculates by buying spot foreign exchange what he is doing is in fact equivalent to acting first as an interest arbitrager in buying spot exchange against a sale of an equal amount of forward exchange, and then as a forward speculator in buying the forward exchange from himself in the expectation that the future spot rate will rise higher than the current forward rate and yield him a pure speculative gain.

In his famous article in "Staff Papers,"scholar S. C. Tsiang showed that the return to spot speculation was equal to the return to forward speculation plus the return to interest arbitrage. This note argues that this result is only strictly true in all cases if there is no government intervention in the forward market. In some situations of government intervention, Tsiang's result will not hold. As a consequence there is a loss of generality of Tsiang's analysis unless other conditions are specified. This paper develops the conditions to tell whether there is government intervention and if such intervention is sufficient to invalidate Tsiang's analysis. The model discussed here is mathematically explained with the help of various equations. To Tsiang "a speculator who speculates on the spot exchange market may, in fact, be regarded as acting implicitly in the combined capacity of an interest arbitrager and a forward exchange speculator. The tentative assumption stated above that all speculation in foreign exchange is carried on in the forward market, does not impair the generality of the analysis as long as speculators who in effect speculate in the spot market are treated according to their dual capacity, namely, first as interest arbitragers and then as speculators in forward exchange".

Despite voluminous literature on the influence of various interest rates on the demand for money, opinions vary widely as to which interest rate or subset of alternative interest rates is a relevant determinant of the demand for money. The present paper shows that contrary to other claims, the yield on nonbank intermediary liabilities is the most significant interest rate variable in affecting the demand for money. Savings deposits at nonbank financial institutions are close substitutes for money. The present study also reveals a plausibility of Baumol-Tobin-Whalen hypothesis of economies of scale in holding cash for transaction and precautionary purposes. It further shows an effect of close money substitutes on measuring the rate of adjustment between the desired and the actual levels of money holdings. Recent theories on holdings of cash balances indicate that when money balances are held for transaction and precautionary purposes, there exist economies of scale in holding money balances.