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Whither Capitalism? Financial Externalities and Crisis

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Author Info

  • Miller, Marcus

    (University of Warwick)

  • Zhang, Lei

    (University of Warwick)

Abstract

As with global warming, so with financial crises – externalities have a lot to answer for. We look at three of them. First the financial accelerator due to ‘fire sales’ of collateral assets -- a form of pecuniary externality that leads to liquidity being undervalued. Second the ‘risk- shifting’ behaviour of highly-levered financial institutions who keep the upside of risky investment while passing the downside to others thanks to limited liability. Finally, the network externality where the structure of the financial industry helps propagate shocks around the system unless this is checked by some form of circuit breaker, or ‘ring-fence’. The contrast between crisis-induced Great Recession and its aftermath of slow growth in the West and the rapid - and (so far) sustained - growth in the East suggests that successful economic progress may depend on how well these externalities are managed.

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Bibliographic Info

Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 79.

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Date of creation: 2012
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Handle: RePEc:cge:warwcg:79

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Related research

Keywords: Externalities; financial accelerator; limited liability; risk-shifting; global imbalances; financial networks;

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References

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  1. Fremdling, Rainer, 1977. "Railroads and German Economic Growth: A Leading Sector Analysis with a Comparison to the United States and Great Britain," The Journal of Economic History, Cambridge University Press, vol. 37(03), pages 583-604, September.
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  3. Jeremy Atack & Fred Bateman & Michael Haines & Robert A. Margo, 2009. "Did Railroads Induce Or Follow Economic Growth? Urbanization And Population Growth In The American Midwest, 1850-60," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-178, Boston University - Department of Economics.
  4. Nathan Nunn & Nancy Qian, 2011. "The Potato's Contribution to Population and Urbanization: Evidence From A Historical Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 593-650.
  5. Florian Ploeckl, 2011. "Towns (and Villages); Definitions and Implications in a Historical Setting," Economics Series Working Papers 536, University of Oxford, Department of Economics.
  6. Howard Bodenhorn & David Cuberes, 2010. "Financial Development and City Growth: Evidence from Northeastern American Cities, 1790-1870," NBER Working Papers 15997, National Bureau of Economic Research, Inc.
  7. Francesco Cinnirella & Erik Hornung, 2011. "Landownership Concentration and the Expansion of Education," CESifo Working Paper Series 3603, CESifo Group Munich.
  8. Jeremy Atack & Michael R. Haines & Robert A. Margo, 2008. "Railroads and the Rise of the Factory: Evidence for the United States, 1850-70," NBER Working Papers 14410, National Bureau of Economic Research, Inc.
  9. Wolfgang Keller & Carol H. Shiue, 2008. "Institutions, Technology, and Trade," NBER Working Papers 13913, National Bureau of Economic Research, Inc.
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Cited by:
  1. Thor Berger & Kerstin Enflo, 2013. "Locomotives of Local Growth: The Short- and Long-Term Impact of Railroads in Sweden," Working Papers 0042, European Historical Economics Society (EHES).

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