Is there an optimal size for the financial sector?

This paper derives the optimal size of the financial sector using a general equilibrium framework that is an extension of the paper of Holmstrom and Tirole (1997) [Quarterly Journal of Economics 112, 663–691]. We show that the financial sector has a unique optimal size relative to the size of the ec...

Full description

Saved in:
Bibliographic Details
Published in:Journal of banking & finance 2000-06, Vol.24 (6), p.945-965
Main Authors: Santomero, Anthony M., Seater, John J.
Format: Article
Language:English
Subjects:
Alliances
Banks
Competition
Economic impact
Economic models
Enterprises
Euro
Financial institutions
Financial sector
Financial services
Financial systems
Intermediation theory
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:This paper derives the optimal size of the financial sector using a general equilibrium framework that is an extension of the paper of Holmstrom and Tirole (1997) [Quarterly Journal of Economics 112, 663–691]. We show that the financial sector has a unique optimal size relative to the size of the economy as a whole. Creating and maintaining this sector requires diversion of some physical capital from production of output to monitoring that production. However, the efficiency gain in output production brought about by monitoring warrants the diversion. It is also found that the optimal size of the financial sector is independent of the state of the economy and does not vary over the business cycle.
ISSN:0378-4266
1872-6372
DOI:10.1016/S0378-4266(99)00113-2