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International policy coordination mechanism with respect to the moral hazards of financial intermediaries


  • Kim, Young-Han


This paper examines the impact of cross-border financial externalities on moral hazards of the banking sector, and an international policy coordination mechanism to reduce the moral hazards of the banking sector considering cross-border financial externalities. We demonstrate that the moral hazard of banking, such as reducing the monitoring efforts, is aggravated by cross-border financial externalities, while the introduction of an international policy coordination mechanism might reduce the moral hazard caused by these externalities. Moreover, international policy coordination is less likely to be sustained when the policy maker is short-sighted and the banking sector has greater political influence. However, when the distortionary cost of a liquidity aids policy is lower with high administrative transparency, and cross-border financial externality is greater, the coordination mechanism is more likely to be sustained. The results imply that efforts to launch an effective international financial coordination mechanism should start with countries with higher administrative transparency, more political stability, and enhanced financial integration.

Suggested Citation

  • Kim, Young-Han, 2011. "International policy coordination mechanism with respect to the moral hazards of financial intermediaries," Economic Modelling, Elsevier, vol. 28(4), pages 1914-1922, July.
  • Handle: RePEc:eee:ecmode:v:28:y:2011:i:4:p:1914-1922

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    References listed on IDEAS

    1. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
    2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    3. Morris, Stephen & Shin, Hyun Song, 2006. "Catalytic finance: When does it work?," Journal of International Economics, Elsevier, vol. 70(1), pages 161-177, September.
    4. Sayantan Ghosal & Marcus Miller, 2003. "Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures," Economic Journal, Royal Economic Society, vol. 113(487), pages 276-304, April.
    5. Corsetti, Giancarlo & Guimaraes, Bernardo & Roubini, Nouriel, 2006. "International lending of last resort and moral hazard: A model of IMF's catalytic finance," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 441-471, April.
    6. Diego Saravia & Ashoka Mody, 2003. "Catalyzing Capital Flows; Do IMF-Supported Programs Work As Commitment Devices?," IMF Working Papers 03/100, International Monetary Fund.
    7. Roberto Chang & Andres Velasco, 2001. "A Model of Financial Crises in Emerging Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 489-517.
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    Cited by:

    1. Carlos Guiné, 2014. "Global Systemically Important Insurers," EIOPA Financial Stability Report - Thematic Articles 2, EIOPA, Risks and Financial Stability Department.


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