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Destructive effects of constructive ambiguity in risky times

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  • Vinogradov, Dmitri

Abstract

Unclear bailout policy, underinvestment and calls for greater responsibility by bankers are some of the observations from the recent financial crisis. The paper explains underinvestment as an inefficient equilibrium. Under ambiguous bailout policy agents suffer from a lack of information about the insolvency resolution methods. The beliefs of bankers regarding whether an insolvent bank is liquidated, may differ from those of depositors even if bankers and depositors possess absolutely symmetric information about the economy. This disrupts the flow of funds through the banking channel if the investment climate is characterized by high aggregate risk. The paper suggests policy implications aimed at a reduction of the anxiety of agents and at aligning their beliefs to restore efficiency.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 31 (2012)
Issue (Month): 6 ()
Pages: 1459-1481

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Handle: RePEc:eee:jimfin:v:31:y:2012:i:6:p:1459-1481

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Bank bailouts; Constructive ambiguity; Policy communication;

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References

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Citations

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Cited by:
  1. Bank for International Settlements, 2011. "Global liquidity - concept, measurement and policy implications," CGFS Papers, Bank for International Settlements, number 45, January.
  2. Marina Doroshenko & Ian Miles & Dmitri Vinogradov, 2013. "Knowledge Intensive Business Services As Generators Of Innovations," HSE Working papers WP BRP 12/STI/2013, National Research University Higher School of Economics.

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