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We confirm this intuition with the help of a simulation. Figure 3 reports the dependency of welfare on the banks’ cost of funds. The four curves are obtained by increasing sequentially the cost of financial intermediation by increments of 20%, and their relative position corresponds inversely to the cost of financial intermediation. The simulation confirms the presence of an inverted U shape, and reveals that a higher cost of financial intermediation shifts the curves downwards and to the right, increasing thereby the ‘welfare maximizing’ interest rate.

Hence, for an efficient enough technology of exchange, financial integration is unambiguously welfare enhancing, whereas for highly inefficient technologies of exchange, financial integration is welfare reducing [as will be the case if the autarky banks’ cost of funds is below the welfare maximizing’ interest rate]. For intermediation cases, the effect of financial liberalization is ambiguous. If the autarky banks’ cost of funds is high, the first stages of financial liberalization are beneficial, but the latter stages may be welfare reducing.

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Further insight is obtained by Figure 4 tracing the excessive risk distortion, measured by the gap between the socially optimal and the competitive risk levels [i.e., the gap between (12’a) and (12a)]. Panel I of Figure 4 corresponds to relatively inefficient intermediation (using the parameter values associated with the bold curve in Figure 3). Panel II of Figure 4 corresponds to the case of relatively efficient intermediation (using the parameter values associated with the solid, top curve in Figure 3). direct lenders for payday loans