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A framework for the analysis of financial reforms and the cost of official safety nets

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  • Isard, Peter
  • Mathieson, Donald J.
  • Rojas-Suarez, Liliana

Abstract

This paper builds a multiperiod, general equilibrium framework for analyzing the macroeconomic effects of financial reforms in developing countries and the costs of maintaining official safety nets under the financial system during such reforms. While a financial liberalization yields efficiency gains, adverse macroeconomic effects can arise if the creditworthiness of the nonfinancial sector is weak. In this situation, financial liberalization may also increase the authorities’ expected deposit insurance funding obligations even with strong prudential supervision. Moreover, given the distortions in a repressed financial system, an increase in the required bank capital-asset ratio may increase the funding obligations associated with deposit insurance, particularly when the debt-servicing capacity of nonfinancial firms is low.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 50 (1996)
Issue (Month): 1 (June)
Pages: 25-79

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Handle: RePEc:eee:deveco:v:50:y:1996:i:1:p:25-79

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References

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  1. Peek, Joe & Rosengren, Eric, 1995. "The Capital Crunch: Neither a Borrower nor a Lender Be," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 625-38, August.
  2. Frederick T. Furlong & Michael C. Keeley, 1987. "Bank capital regulation and asset risk," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 20-40.
  3. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
  4. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  5. Herbert Baer & John McElravey, 1992. "Capital adequacy and the growth of U.S. banks," Working Paper Series, Issues in Financial Regulation 92-11, Federal Reserve Bank of Chicago.
  6. Stephen D. Williamson, 1987. "Recent developments in modeling financial intermediation," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 19-29.
  7. John H. Boyd & Edward C. Prescott, 1985. "Financial intermediary-coalitions," Staff Report 87, Federal Reserve Bank of Minneapolis.
  8. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  9. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  10. Caprio Jr, Gerard & Atiyas, Izak & Hanson, James, 1993. "Financial reform lessons and strategies," Policy Research Working Paper Series 1107, The World Bank.
  11. Cho, Y-J. & Khatkhate, D., 1989. "Lessons Of Financial Liberalization In Asia - A Comparative Study," World Bank - Discussion Papers 50, World Bank.
  12. Peter J. Montiel, 1991. "The Transmission Mechanism for Monetary Policy in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 83-108, March.
  13. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
  14. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  15. Steven Riess Weisbrod & Liliana Rojas-Suárez, 1994. "Financial Market Fragilities in Latin America," IMF Working Papers 94/117, International Monetary Fund.
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Cited by:
  1. Klaus P. Fischer & Martin Chenard, 1997. "Financial Liberalization Causes Banking System Fragility," Finance 9706004, EconWPA.
  2. Pablo Emilio Guidotti & Jose De Gregorio, 1992. "Financial Development and Economic Growth," IMF Working Papers 92/101, International Monetary Fund.
  3. P.R. Agenor & J. Aizenman & A. Hoffmaister, 1998. "Contagion, Bank Lending Spreads and Output Fluctuations," NBER Working Papers 6850, National Bureau of Economic Research, Inc.

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