On%20Endogenous%20Risk%2C%20the%20Amplification%20Effects%20of%20Financial%20Systems%20and%20Macro%20Prudential%20Policies

Working Papers

On Endogenous Risk, the Amplification Effects of Financial Systems and Macro Prudential Policies


CODE: IDB-WP-276
AUTHOR(s): Majnoni, Giovanni , Powell, Andrew
PUBLISHED: November 2011
LANGUAGE: English
RELATED TOPICS: Finance
DOWNLOAD FILE IN: English

Abstract:

This paper proposes an analytical framework that combines exogenous and endogenous risks, the latter stemming from frictions in financial markets. Arguing that endogenous risks may be systemic and costly, the paper employs a database of emerging market corporate bond spreads and finds evidence that endogenous risks are present and have amplified the effects of financial crises. Larger financial systems exacerbate the impact of crises, and weaker financial systems exacerbate particularly the impact of banking crises. The results suggest that policymakers should monitor time-varying systemic risks using both price and quantity signals and take actions in good times to mitigate potential amplifying effects at times of stress.

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