UNDERSTANDING STATE INTERVENTION IN THE FINANCIAL SYSTEM: A SIMPLE FRAMEWORK

Inseok Shin ()
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Inseok Shin: College of Business Administration, Chung-Ang University

Journal of Economic Development, 2008, vol. 33, issue 1, 165-185

Abstract: I offer a simple framework to address why state intervention in the financial system, prevalent in less developed economies, yields various welfare outcomes, and why such conventional reforms as privatization and fiscal reforms prove insufficient to eliminate state intervention. In the model three institutional factors are in play: 1) control rights over financial institutions; 2) cash-flow rights of the private over financial institutions; 3) monitoring capability of the public on tax/resource collection by the state. Based on the model, I show that state intervention can be developmental or derogatory depending on institutional traits including degree of privatization and monitoring capability of the public over the tax collection by the state. Further I illustrate that as long as state has control rights, conventional reforms such as fiscal reform and privatization may not be enough in eliminating state intervention in the financial system.

Keywords: State Intervention; Financial System; Control Rights; Privatization; Fiscal Reform (search for similar items in EconPapers)
JEL-codes: N20 O16 P48 (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:jed:journl:v:33:y:2008:i:1:p:165-185

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