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A Framework for the Analysis of Financial Reforms and the Cost of official Safety Nets

  • Peter Isard
  • Liliana Rojas-Suárez
  • Donald J. Mathieson

This paper builds a multiperiod, general equilibrium framework for analyzing the macroeconomic effects of financial reforms in developing countries and the costs of maintaining official safety nets under the financial system during such reforms. While a financial liberalization yields efficiency gains, adverse macroeconomic effects can arise if the creditworthiness of the nonfinancial sector is weak. In this situation, financial liberalization may also increase the authorities’ expected deposit insurance funding obligations even with strong prudential supervision. Moreover, given the distortions in a repressed financial system, an increase in the required bank capital-asset ratio may increase the funding obligations associated with deposit insurance, particularly when the debt-servicing capacity of nonfinancial firms is low.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 92/31.

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Length: 70
Date of creation: 01 May 1992
Date of revision:
Handle: RePEc:imf:imfwpa:92/31
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  1. John H. Boyd & Edward C. Prescott, 1985. "Financial intermediary-coalitions," Staff Report 87, Federal Reserve Bank of Minneapolis.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  3. Peter Montiel, 1990. "The Transmission Mechanism for Monetary Policy in Developing Countries," IMF Working Papers 90/47, International Monetary Fund.
  4. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
  5. Stephen D. Williamson, 1987. "Recent developments in modeling financial intermediation," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 19-29.
  6. Joe Peek & Eric Rosengren, 1993. "The Capital Crunch: Neither A Borrower Nor A Lender Be," Boston College Working Papers in Economics 243, Boston College Department of Economics.
  7. Cho, Y-J. & Khatkhate, D., 1989. "Lessons Of Financial Liberalization In Asia - A Comparative Study," World Bank - Discussion Papers 50, World Bank.
  8. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  9. Steven Riess Weisbrod & Liliana Rojas-Suárez, 1994. "Financial Market Fragilities in Latin America; From Banking Crisis Resolution to Current Policy Challenges," IMF Working Papers 94/117, International Monetary Fund.
  10. Herbert Baer & John McElravey, 1992. "Capital adequacy and the growth of U.S. banks," Working Paper Series, Issues in Financial Regulation 92-11, Federal Reserve Bank of Chicago.
  11. Frederick T. Furlong & Michael C. Keeley, 1987. "Bank capital regulation and asset risk," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 20-40.
  12. Caprio Jr, Gerard & Atiyas, Izak & Hanson, James, 1993. "Financial reform lessons and strategies," Policy Research Working Paper Series 1107, The World Bank.
  13. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  14. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  15. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
  16. Gray, Jo Anna & Wu, Ying, 1995. "On equilibrium credit rationing and interest rates," Journal of Macroeconomics, Elsevier, vol. 17(3), pages 405-420.
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