Staff Report 112

International Financial Intermediation and Aggregate Fluctuations Under Alternative Exchange Rate Regimes

Jeremy Greenwood
Stephen D. Williamson

Published February 1, 1988

This paper presents a two-country overlapping generations model in which financial intermediation arises endogenously as an incentive-compatible means of economizing on monitoring costs. Because of the existence of transactions costs, money markets in the two countries are segmented and investors have differential access to international credit markets. The model is used to generate predictions about the role of international intermediation in economic development and to examine the nature of business cycle phenomena across alternative exchange rate regimes. Disturbances are propagated by a credit allocation mechanism, which also lends a novel flavor to the model’s long-run properties.

Published In: Journal of Monetary Economics (Vol. 23, No. 3, May 1989, pp. 401-431)

Download Paper (pdf)