December 2020

Collective Merely Hazard and the Interbank Market

Levent Altinoglu and Joseph E. Stiglitz

Abstract:

The focus of risk interior monetary arrangement is conception of as to be a provide of systemic instability. We recommend a theory to display the structure of the monetary arrangement and display the procedure in which it alters the probability taking incentives of financial institutions. We make a mannequin of portfolio choice and endogenous contracts thru which the federal government optimally intervenes all over crises. By issuing monetary claims to other institutions, somewhat volatile institutions endogenously change into extensive and interconnected. This structure permits institutions to part the probability of systemic disaster in a privately optimum manner, nonetheless channels funds to somewhat volatile investments and creates incentives even for smaller institutions to rob outrageous risks. Constrained efficiency is also utilized sms lån på minuttet macroprudential regulations designed to restrict the interconnectedness of volatile institutions.

DOI: https://doi.org/10.17016/FEDS.2020.098

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December 02, 2020

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