Financial system
Subtitle: shock absorber or amplifier?
By: by Franklin Allen and Elena Carletti.
Contributors: Carletti, Elena.; Bank for International Settlements. Monetary and Economic Dept.
Series: BIS working papers -- no. 257
Publisher: Bank for International Settlements
Published: 2008
Place of publication: Basel, Switzerland
Language: eng
Format: Electronic resource
Description: This paper identifies two types of market failures. The first concerns a coordination problem associated with panics. The problem in analysing this type of market failure from a policy perspective is that there is no widely accepted method for selecting equilibria. The second market failure concerns the incompleteness of financial markets. The essential problem here is that the incentives to provide liquidity lead to an inefficient allocation of resources. The paper outlines three manifestations of market failure associated with liquidity provision: financial fragility, contagion and asset price bubbles. The framework developed allows some insight into the question of when the financial system acts a shock absorber and when it acts as an amplifier. Having identified when there is a market failure, the paper looks at whether there are policies that can correct the undesirable effects of such failures.
Notes: Title from PDF file (viewed on Oct. 10, 2008).

"July 2008."

"Monetary and Economic Department."

Includes bibliographical references.

Also available in print.

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Mode of access: World Wide Web.