A two country overlapping generations model is constructed, in which financial intermediation arises endogenously as an incentive compatible means of economizing on monitoring costs. Because of the existence of transaction 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 concerning 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.
- Federal Reserve Bank of Minneapolis. Research Division.
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