Asymmetric information: the multiplier effect of financial instability
AbstractFinancial 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.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 23013.
Date of creation: 01 Mar 2010
Date of revision:
Asymmetric information; Financial instability; Credit spread; credit crunch; derivatives; downturn; recession; crisis forecast.;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-11 (All new papers)
- NEP-BAN-2010-06-11 (Banking)
- NEP-CTA-2010-06-11 (Contract Theory & Applications)
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.:
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