Financial system: shock absorber or amplifier?
AbstractThis paper identifies two types of market failures. The first concerns a coordination problem associated with panics. The problem in analysing this type of market failure from a policy perspective is that there is no widely accepted method for selecting equilibria. The second market failure concerns the incompleteness of financial markets. The essential problem here is that the incentives to provide liquidity lead to an inefficient allocation of resources. The paper outlines three manifestations of market failure associated with liquidity provision: financial fragility, contagion and asset price bubbles. The framework developed allows some insight into the question of when the financial system acts a shock absorber and when it acts as an amplifier. Having identified when there is a market failure, the paper looks at whether there are policies that can correct the undesirable effects of such failures.
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Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 257.
Length: 26 pages
Date of creation: Jul 2008
Date of revision:
bank regulation; financial crisis; financial intermediation; market failure;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-30 (All new papers)
- NEP-FMK-2008-07-30 (Financial Markets)
- NEP-PKE-2008-07-30 (Post Keynesian Economics)
- NEP-REG-2008-07-30 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Franklin Allen & Douglas Gale, 2003.
"Financial Intermediaries and Markets,"
Center for Financial Institutions Working Papers
00-44, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Ang, James B., 2011. "Finance and consumption volatility: Evidence from India," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 947-964, October.
- Andreas Horsch, 2012. "Managerial Action And Financial Crisis," Polish Journal of Management Studies, Czestochowa Technical University, Department of Management, vol. 5(1), pages 7-33, June.
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