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Destructive effects of constructive ambiguity in risky times

  • Vinogradov, Dmitri

Unclear bailout policy, underinvestment and calls for greater responsibility by bankers are some of the observations from the recent financial crisis. The paper explains underinvestment as an inefficient equilibrium. Under ambiguous bailout policy agents suffer from a lack of information about the insolvency resolution methods. The beliefs of bankers regarding whether an insolvent bank is liquidated, may differ from those of depositors even if bankers and depositors possess absolutely symmetric information about the economy. This disrupts the flow of funds through the banking channel if the investment climate is characterized by high aggregate risk. The paper suggests policy implications aimed at a reduction of the anxiety of agents and at aligning their beliefs to restore efficiency.

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File URL: http://www.sciencedirect.com/science/article/pii/S0261560612000526
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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 31 (2012)
Issue (Month): 6 ()
Pages: 1459-1481

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Handle: RePEc:eee:jimfin:v:31:y:2012:i:6:p:1459-1481
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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