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Understanding State Intervention In The Financial System: A Simple Framework

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  • Inseok Shin

    () (College of Business Administration, Chung-Ang University)

Abstract

I offer a simple framework to address why state intervention in the financial system, prevalent in less developed economies, yields various welfare outcomes, and why such conventional reforms as privatization and fiscal reforms prove insufficient to eliminate state intervention. In the model three institutional factors are in play: 1) control rights over financial institutions; 2) cash-flow rights of the private over financial institutions; 3) monitoring capability of the public on tax/resource collection by the state. Based on the model, I show that state intervention can be developmental or derogatory depending on institutional traits including degree of privatization and monitoring capability of the public over the tax collection by the state. Further I illustrate that as long as state has control rights, conventional reforms such as fiscal reform and privatization may not be enough in eliminating state intervention in the financial system.

Suggested Citation

  • Inseok Shin, 2008. "Understanding State Intervention In The Financial System: A Simple Framework," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 33(1), pages 165-185, June.
  • Handle: RePEc:jed:journl:v:33:y:2008:i:1:p:165-185
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    Keywords

    State Intervention; Financial System; Control Rights; Privatization; Fiscal Reform;

    JEL classification:

    • P48 - Economic Systems - - Other Economic Systems - - - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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