 Whither Capitalism? Financial Externalities and CrisisMarcus Miller and
Lei Zhang
CAGE Online Working Paper Series from Competitive Advantage in the Global Economy (CAGE) Abstract: As with global warming, so with financial crises – externalities have a lot to answer for. We look at three of them. First the financial accelerator due to ‘fire sales’ of collateral assets -- a form of pecuniary externality that leads to liquidity being undervalued. Second the ‘risk- shifting’ behaviour of highly-levered financial institutions who keep the upside of risky investment while passing the downside to others thanks to limited liability. Finally, the network externality where the structure of the financial industry helps propagate shocks around the system unless this is checked by some form of circuit breaker, or ‘ring-fence’. The contrast between crisis-induced Great Recession and its aftermath of slow growth in the West and the rapid - and (so far) sustained - growth in the East suggests that successful economic progress may depend on how well these externalities are managed. Keywords: Externalities; financial accelerator; limited liability; risk-shifting; global imbalances; financial networks (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cge:wacage:79 Access Statistics for this paper More papers in CAGE Online Working Paper Series from Competitive Advantage in the Global Economy (CAGE) Contact information at EDIRC. |
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