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Capital markets, financial intermediaries and liquidity supply

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We study a dynamic economy endowed with a sequence of overlapping generations of consumers and production processes and where productive assets are illiquid and consumption preferences are subject to uninsurable demand for liquidity. We characterize the steady states that can be achieved with alternative financial systems. We show that infinitely lived financial intermediaries offering a liability with age-dependent restricitions may implement a social optimum with full insurance. If instead they offer anonymous unrestricted contracts then only second -best consumption allocations with partial insurance obtain. We also examine the consumption allocations available when agents can tradeshars in competitive stock markets. While allowing for trade across generations may or may not improve upon generational autarky, we show that this competitive equilibrium is not a social optimum and is dominated by a system of infinitely lived unrestricted intermediaries

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