Banks, Credibility and Macroeconomic Evolution after a Production Shock

Vinogradov, D. (2009) Banks, Credibility and Macroeconomic Evolution after a Production Shock. Working Paper. Essex Finance Centre.

Abstract

One of the important functions of financial intermediation is intertemporal risk smoothing. This paper studies the effects of a production shock in a closed economy and compares the abilities of market-based and bank-based financial systems in processing the shock. The analysis of the shock propagation indicates that a competitive banking system may collapse in absence of a proper regulation. Paradoxically, it is the credibility of banks that makes bank-based economies fragile. A necessary and sufficient condition for successfull bailout schemes is proposed.

• Item Type: Research Reports or Papers (Working Paper)
• Status: Published
• Glasgow Author(s) Enlighten ID: Vinogradov, Professor Dmitri
• Authors: Vinogradov, D.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Publisher: Essex Finance Centre
• Copyright Holders: Copyright © 2009 The Author
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher