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International policy coordination mechanism with respect to the moral hazards of financial intermediaries

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  • Kim, Young-Han

Abstract

This paper examines the impact of cross-border financial externalities on moral hazards of the banking sector, and an international policy coordination mechanism to reduce the moral hazards of the banking sector considering cross-border financial externalities. We demonstrate that the moral hazard of banking, such as reducing the monitoring efforts, is aggravated by cross-border financial externalities, while the introduction of an international policy coordination mechanism might reduce the moral hazard caused by these externalities. Moreover, international policy coordination is less likely to be sustained when the policy maker is short-sighted and the banking sector has greater political influence. However, when the distortionary cost of a liquidity aids policy is lower with high administrative transparency, and cross-border financial externality is greater, the coordination mechanism is more likely to be sustained. The results imply that efforts to launch an effective international financial coordination mechanism should start with countries with higher administrative transparency, more political stability, and enhanced financial integration.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 4 (July)
Pages: 1914-1922

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:4:p:1914-1922

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: International policy coordination Informational barriers Moral hazards Cross-border financial externalities;

References

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  1. Jean-Charles Rochet & Xavier Vives, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," FMG Discussion Papers, Financial Markets Group dp408, Financial Markets Group.
  2. Diego Saravia & Ashoka Mody, 2003. "Catalyzing Capital Flows," IMF Working Papers 03/100, International Monetary Fund.
  3. Ghosal, Sayantan & Miller, Marcus, 2003. "Coordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3729, C.E.P.R. Discussion Papers.
  4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  5. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc.
  6. Morris, Stephen & Shin, Hyun Song, 2006. "Catalytic finance: When does it work?," Journal of International Economics, Elsevier, Elsevier, vol. 70(1), pages 161-177, September.
  7. Roberto Chang & Andrés Velasco, 2001. "A Model Of Financial Crises In Emerging Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(2), pages 489-517, May.
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Cited by:
  1. Carlos Guiné, 2014. "Global Systemically Important Insurers," EIOPA Finacial Stability Report - Thematic Articles 2, EIOPA, Financial Stability and Information Unit.

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