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Asymmetric information: the multiplier effect of financial instability

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  • Skardziukas, Domantas

Abstract

Financial markets and financial intermediation are essential to well-functioning economy. They perform the role of channeling funds to parties that have value creating investment opportunities. However, asymmetric information can seriously impair the process when parties to the financial contract are not fully aware of the risks involved and, as a result, can limit their exposure to financial agreements to prevent themselves from possible losses. Increasing asymmetric information as we explain in the article has a tendency to bring a ripple effect in the financial system. This negative money multiplier then sets the stage until it severely hampers money supply, productive investment opportunities and finally aggregate economic activity. The article introduces the reader with the framework of asymmetric information developed by several authors in the last few decades and builds on the recent financial developments that pose new challenges.

Suggested Citation

  • Skardziukas, Domantas, 2010. "Asymmetric information: the multiplier effect of financial instability," MPRA Paper 23013, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:23013
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    File URL: https://mpra.ub.uni-muenchen.de/23013/1/MPRA_paper_23013.pdf
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    References listed on IDEAS

    as
    1. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    2. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    3. Frederic S. Mishkin, 1991. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Chapters, in: Financial Markets and Financial Crises, pages 69-108, National Bureau of Economic Research, Inc.
    4. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
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    Cited by:

    1. Mostafa Saidur Rahim Khan & Naheed Rabbani & Yoshihiko Kadoya, 2020. "Is Financial Literacy Associated with Investment in Financial Markets in the United States?," Sustainability, MDPI, vol. 12(18), pages 1-14, September.

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    More about this item

    Keywords

    Asymmetric information; Financial instability; Credit spread; credit crunch; derivatives; downturn; recession; crisis forecast.;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G2 - Financial Economics - - Financial Institutions and Services
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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