ACTIVE INTERMEDIATION IN A MONETARY OVERLAPPING GENERATIONS ECONOMY

This paper establishes that the profit-seeking activities of private i ntermediaries can ensure Pareto efficiency in the standard pure-exchan ge monetary overlapping generations economy without the need for gover nment monetary or fiscal policy intervention. Moreover, these profit-s eeking activities are shown to rule out all aperiodic and k-periodic c ycles for k greater than 2. Contrary to much recent work on intermedia tion, the profit opportunities that arise for intermediaries in this c ontext are not due to assumed frictions or asymmetric information. Rat her, they are due to the dynamic open-ended structure of the economy, which permits debt roll-over. (C) 1998 Elsevier Science B.V. All right s reserved.