Panetti, Ettore (2011): Financial liberalization and contagion with unobservable savings.
Download (302Kb) | Preview
How do market-based channels for the provision of liquidity affect financial liberalization and contagion? In order to answer this question, I extend the Diamond and Dybvig (1983) model of financial intermediation to a two-country environment with unobservable markets for borrowing and lending and comparative advantages in the investment technologies. I demonstrate that the role of hidden markets crucially depends on the level of financial integration of the economy. Despite always imposing a burden on intermediaries, unobservable markets allow agents to partially enjoy gains from financial integration when interbank markets are autarkic. In fully liberalized systems such effect instead disappears. Similarly, in autarky the distortion created by hidden markets improve the resilience of the system to unexpected liquidity shocks. With fully integrated interbank markets, such effect again disappears, as unexpected liquidity shocks always lead to bankruptcy and contagion.
|Item Type:||MPRA Paper|
|Original Title:||Financial liberalization and contagion with unobservable savings|
|Keywords:||financial intermediation, financial liberalization, financial contagion, unobservable savings|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
|Depositing User:||Ettore Panetti|
|Date Deposited:||16. Mar 2011 11:59|
|Last Modified:||15. Feb 2013 02:58|
Allen, F. and D. Gale (2000, February). Financial Contagion. Journal of Political Economy 108 (1), 1–33.
Allen, F. and D. Gale (2004, July). Financial Intermediaries and Markets. Econometrica 72 (4), 1023–1061.
Brusco, S. and F. Castiglionesi (2007, October). Liquidity Coinsurance, Moral Hazard, and Financial Contagion. Journal of Finance 62 (5), 2275–2302.
Diamond, D. W. and P. H. Dybvig (1983). Bank Runs, Liquidity and Deposit Insurance. Journal of Political Economy 91, 401–419.
Farhi, E., M. Golosov, and A. Tsyvinski (2009). A Theory of Liquidity and Regulation of Financial Intermediation. Review of Economic Studies 76, 973–992.
FDIC (1997). History of the Eighties - Lessons for the Future. Technical report, Federal Deposit Insurance Corporation.
Golosov, M. and A. Tsyvinski (2007). Optimal Taxation with Endogenous Insurance Markets. Quarterly Journal of Economics 122, 487–534.
Gorton, G. (1988). Banking Panics and Business Cycles. Oxford Economic Papers 40 (3), 751–781.
Imai, M. and S. Takarabe (2011, January). Bank Integration and Transmission of Financial Shocks: Evidence from Japan. American Economic Journal: Macroeconomics 3 (1), 155– 183.
Iyer, R. and J.-L. Peydro (2010, January). Interbank Contagion at Work: Evidence from a Natural Experiment. ECB Working Paper Series No. 1147.
Mediobanca Research Department (2010, November). Public Support Measures in Europe and in the United States. Technical report, Mediobanca Research Department.
Panetti, E. (2011, February). Unobservable Savings, Risk Sharing and Default in the Financial System. mimeo.
Pozsar, Z., T. Adrian, A. Ashcraft, and H. Boesky (2010, July). Shadow Banking. Staﬀ Report 458, Federal Reserve Bank of New York.
White, L. J. (1991). The S&L debacle: Public policy lessons for bank and thrift regulation. New York: Oxford University Press.