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Adverse Selection and Financial Crises

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    Abstract

    The recent financial crisis has highlighted the importance of adverse selection as a contributing factor to financial market instability. In this article, the author examines the phenomenon of adverse selection and explains how its presence in a particular market can lead to market freezes and liquidity hoarding. She also describes several mechanisms that can propagate the initially small effect of adverse selection to the entire financial system. Possible policy responses and their effectiveness are also discussed.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2011/02/kirabaeva.pdf
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    Bibliographic Info

    Article provided by Bank of Canada in its journal Bank of Canada Review.

    Volume (Year): 2010-2011 (2011)
    Issue (Month): Winter ()
    Pages: 11-19

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    Handle: RePEc:bca:bcarev:v:2010-2011:y:2011:i:winter10-11:p:11-19

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    Web page: http://www.bank-banque-canada.ca/

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    Cited by:
    1. Kooths, Stefan & van Roye, Björn, 2012. "Nationale Geldschöpfung im Euroraum: Mechanismen, Defekte, Therapie," Kiel Discussion Papers 508/509, Kiel Institute for the World Economy (IfW).
    2. Sokolovskyi, Dmytro & Sokolovska, Olena, 2013. "The problem of arising the Pareto inefficient norm in relations “investor – government” type," MPRA Paper 44745, University Library of Munich, Germany.

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