208-2011-L14

208-2011-L14 - Econ208 MarekKapicka Lecture14...

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Econ 208 Marek Kapicka Lecture 14 Financial Intermediation
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2. A Market Solution Period 1: A Market for Long Assets  Supply Demand
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2. A Market Solution Period 0 problem
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2. A Market Solution The equilibrium
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2. A Market Solution Market vs. Autarchy Autarchic choices Market Equilibrium
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2. A Market Solution Market vs. Autarchy n Market can achieve more risk sharing  than autarchy n We will see that we can do even better  than that n The amount of liquidity provided by the  market is not, in general, efficient
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A Liquidity Problem 1. Autarchic Solution 2. Market Solution 3. Efficient Solution 4. Banking Solution
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3. The Efficient Solution What is efficiency?
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3. The Efficient Solution Social planner’s problem n Social planner: n Maximize the expected utility Subject to n WLOG assume that late consumers only  consume in period 2
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3. The Efficient Solution Social Planner’s problem n Social planner: n Maximize the expected utility n First order condition
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3. The Efficient Solution Case 1: Too little liquidity in the market solution Market Equilibrium Efficient Solution
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3. The Efficient Solution Case 2: Too much liquidity in the market solution Market Equilibrium Efficient Solution
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208-2011-L14 - Econ208 MarekKapicka Lecture14...

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