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Contextualizing Systemic Risk

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  • Lukas Scheffknecht

Abstract

I analyze the rapidly growing literature about systemic risk in financial markets and find an important commonality. Systemic risk is regarded to be an endogenous outcome of interactions by rational agents on imperfect markets. Market imperfections give rise to systemic externalities which cause an excessive level of systemic risk. This creates a scope for welfare-increasing government interventions. Current policy debates usually refer to them as ’macroprudential regulation’. I argue that efforts undertaken in this direction - most notably the incipient implementation of Basel III- are insufficient. The problem of endogenous financial instability and excessive systemic risk remains an unresolved issue which carries unpleasant implications for central bankers. In particular, monetary policy is in danger of persistently getting burdened with the difficult task to simultaneously ensure macroeconomic and financial stability.

Suggested Citation

  • Lukas Scheffknecht, 2013. "Contextualizing Systemic Risk," ROME Working Papers 201317, ROME Network.
  • Handle: RePEc:rmn:wpaper:201317
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    References listed on IDEAS

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    More about this item

    Keywords

    Systemic Risk; Systemic Externalities; Macroprudential Regulation; Basel III;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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