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Finance and risk: does finance create risk?

  • Giancarlo Bertocco

    ()

    (Department of Economics, University of Insubria, Italy)

Rajan has earned a well-deserved reputation for having been one of the few to have hypothesized in a famous paper presented at the 2005 Jackson Hole conference that a disastrous financial crisis could have occurred. The key thesis put forward by Rajan was that the radical changes that had taken place over the previous decades rendered the economic system more fragile in that they induced the financial system to create a high amount of risk. The aim of this paper is to show: i) that Rajan’s thesis is not coherent with the mainstream theory according to which finance does not create risk; ii) that a meaningful theory capable of explaining the meaning of the elements used by Rajan to assert that finance creates risk can be elaborated on the basis of the lesson of Keynes and Schumpeter

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Paper provided by Department of Economics, University of Insubria in its series Economics and Quantitative Methods with number qf1115.

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Length: 30 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:ins:quaeco:qf1115
Contact details of provider: Postal: Via Ravasi 2-21100 Varese
Web page: http://www.uninsubria.it/uninsubria/facolta/econo.html

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  1. David Colander, 2010. "The Economics Profession, the Financial Crisis, and Method," Middlebury College Working Paper Series 1038, Middlebury College, Department of Economics.
  2. James Crotty, 2008. "Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’," UMASS Amherst Economics Working Papers 2008-14, University of Massachusetts Amherst, Department of Economics.
  3. Raghuram G. Rajan, 2006. "Has Finance Made the World Riskier?," European Financial Management, European Financial Management Association, vol. 12(4), pages 499-533.
  4. David Laidler, 2009. "Lucas, Keynes, and the Crisis," UWO Department of Economics Working Papers 20092, University of Western Ontario, Department of Economics.
  5. James Crotty, 2011. "The Realism of Assumptions Does Matter: Why Keynes-Minsky Theory Must Replace Efficient Market Theory as the Guide to Financial Regulation Policy," UMASS Amherst Economics Working Papers 2011-05, University of Massachusetts Amherst, Department of Economics.
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  13. Robert Skidelsky, 2011. "The relevance of Keynes," Cambridge Journal of Economics, Oxford University Press, vol. 35(1), pages 1-13.
  14. Jan Kregel, 2009. "Why don't the bailouts work? Design of a new financial system versus a return to normalcy," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 653-663, July.
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  17. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
  18. Hyman P. Minsky, 1980. "Money, Financial Markets, and the Coherence of a Market Economy," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 3(1), pages 21-31, October.
  19. Axel Leijonhufvud, 2009. "Out of the corridor: Keynes and the crisis," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 741-757, July.
  20. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-51, September.
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