Asymmetric information: the multiplier effect of financial instability

Domantas Skardziukas

MPRA Paper from University Library of Munich, Germany

Abstract: Financial markets and financial intermediation are essential to well-functioning economy. They perform the role of channeling funds to parties that have value creating investment opportunities. However, asymmetric information can seriously impair the process when parties to the financial contract are not fully aware of the risks involved and, as a result, can limit their exposure to financial agreements to prevent themselves from possible losses. Increasing asymmetric information as we explain in the article has a tendency to bring a ripple effect in the financial system. This negative money multiplier then sets the stage until it severely hampers money supply, productive investment opportunities and finally aggregate economic activity. The article introduces the reader with the framework of asymmetric information developed by several authors in the last few decades and builds on the recent financial developments that pose new challenges.

Keywords: Asymmetric information; Financial instability; Credit spread; credit crunch; derivatives; downturn; recession; crisis forecast. (search for similar items in EconPapers)
JEL-codes: G0 G01 G14 G2 G38 N22 (search for similar items in EconPapers)
Date: 2010-03-01
New Economics Papers: this item is included in nep-ban and nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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