capital markets, financial intermediaries, and liquidity.pdf

CAPITAL MARKETS, FINANCIAL INTERMEDIARIES, AND LIQUIDITY SUPPLY by P. FULGHIERI* and R. ROVELLI** 98/19/FIN * Associate Professor of Finance at INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France. Department of Economics, University of Bologna, Milano, Italy. A working paper in the INSEAD Working Paper Series is intended as a means whereby a faculty researchers thoughts and findings may be communicated to interested readers. The paper should be considered preliminary in nature and may require revision. Printed at INSEAD, Fontainebleau, France. CAPITAL MARKETS, FINANCIAL INTERMEDIARIES, AND LIQUIDITY SUPPLY Paolo Fulghieri Finance Area, INSEAD, Boulevard de Constance, Fontainebleau, 77305 France, and Center for Economic Policy Research, London, UK. Riccardo Rovelli Dipartimento di Economia, University di Bologna, Strada Maggiore 45, 40125 Bologna, Italy and IGIER, Milano, Italy. Abstract. 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 financia