Misintermediation and Business Fluctuation
Individuals plan consumption and production for different points in the future, using interest rates of various maturities as a guide. How-ever, individuals do not always pre-contract all planned future borrowing and lending, and the intermediaries they work through often do not match the maturity structure of their assets and liabilities. As a result of this individual failure to hedge and institutional "misintermediation", aggregate production and consumption plans for each period in the future need not coincide. The resulting discrepancy will eventually appear as a recession or boom, involving an unanticipated change in interest rates. Fiscal stimulus aggravates the welfare loss associated with a recession, whether the spending is consumption-displacing or wholly wasteful.
The author is Scherman Research Fellow at NBER-West and Assistant Professor of Economics at Boston College (on leave). He is indebted to A. Collery, J. Frenkel, M. Friedman, R. Hetzel, A. Leijonhufvud, S. Maisel, R. McCulloch, J. Meginniss, R. Shay, R. Zecher, others mentioned in the text, and the participants in various workshops for helpful suggestions and/or encouragement. None of these individuals necessarily subscribes to the argument of the paper. Work on earlier drafts was partially supported by the Earhart Foundation; the paper was rewritten while at NBER-West.
McCulloch, J. Huston. "Misintermediation and Macroeconomic Fluctuations," Journal of Monetary Eocnomics, Vol. 8, No. 1, pp. 103-115, (July 1981).