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The effects of the organization of an asset market on liquidity are studied using a model of financial intermediation. Findings reveal that a reform that lowers the market power of the dealers may result to reduced trading costs, dealers' net entry, and an increased trade volume. The model also indicates that markets of similar structures may post different liquidity results.

We assess the channels through which financial intermediaries affect economic volatility. Building on Bacchetta and Caminal (2000, Do capital market imperfections exacerbate output fluctuations? European Economic Review 44(3), 449-468) our theoretical model predicts that well-developed financial intermediaries dampen the effect of real sector shocks and magnify the effect of monetary shocks. Using a panel of 63 countries over the period 1960-1997 and using the volatility of terms of trade and inflation to proxy for real and monetary volatility, respectively, we find (i) weak evidence that financial intermediaries dampen the effect of terms of trade volatility, and (ii) some evidence that financial intermediaries magnify the impact of inflation volatility in countries where firms have little or no access to external finance through capital markets. JEL classification: Financial intermediation; Growth volatility; Credit channel Keywords: E44; E51; G21; O16

In a finite trader version of the Diamond and Dybvig model, the ex ante efficient allocation is implementable by a direct mechanism in which truthful revelation is the strictly service constraint, the truth-telling equilibrium implements the symmetric, ex ante efficient allocation with respect to iterated elimination of strictly dominated strategies.

This article presents a monetary growth model where spatial separation and limited communication create a role for banks. Monetary policy interacts with the financial system's liquidity provision to affect the existence, multiplicity, and dynamical properties of equilibria. Moderate levels of risk aversion and tight monetary policy can lead to multiple steady states. Dynamical equilibria can be indeterminate, with oscillatory paths. Thus financial market frictions are a source of indeterminacies and endogenous volatility. Under plausible conditions, tight monetary policy raises the nominal interest rate and inflation rate and reduces long run output. Thus, a central bank's liquidity provision can promote growth.

Four alternative investment products (AIP) intermediaries were analyzed to address the problems of expensive imperfect information and the potential for corruption. These are modified mutual fund, secured investment trust, pension fund investment innovation and venture capital investment. It was noted that the rate of adoption and the funding level of AIP's are very low compared to other major pension plans. Furthermore, those intermediaries offering AIP's will get the most resources from pension funds which aim to diversify their asset allocations.

In a financial market, the investor searches for investment projects and bargains with the entrepreneur about the financial contract. Alternatively, he may delegate search and bargaining to a financial intermediary. Delegation generates a commitment advantage in bargaining. It may, however, induce excessively risky investments because the investor cannot monitor the intermediary's search behavior. This restricts the parameter constellations under which equilibrium intermediation occurs. Competition may not reduce the intermediaries' profits to zero because of incentive restrictions. Keywords: Intermediation; Bargaining; Search JEL classification: C78, D83, G21

An endogenous growth model with multiple assets is developed. Agents who face random future liquidity needs accumulate capital and a liquid, but unproductive asset. The effects of introducing financial intermediation into this environment are considered. Conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital, causing intermediation to be growth promoting. In addition, intermediaries generally reduce socially unnecessary capital liquidation, again tending to promote growth.

A model designed to identify the ideal bank capital structure is presented. Findings revealed that a capitalized intermediary offers liquidity at a lower cost and provides more funds to investments which are most efficient. The sources of market failure are examined.