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

The recent global financial crisis has put the spotlight on macro-prudential policies to protect firms and households from problems emanating from the financial sector. This paper proposes an analytical framework that combines exogenous and endogenous risks, the latter seen as 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 are found to exacerbate the impact of crises, and weaker financial systems are found to 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.

Bibliographic Details

Main Author:	Inter-American Development Bank
Other Authors:	Giovanni Majnoni
Format:	Working Papers biblioteca
Language:	English
Published:	Inter-American Development Bank
Subjects:	Financial Risk, Financial Crisis and Structural Adjustement, Fiscal Policy, Monetary Policy, E32 - Business Fluctuations • Cycles, E44 - Financial Markets and the Macroeconomy, E58 - Central Banks and Their Policies, F30 - International Finance: General, G01 - Financial Crises, G30 - Corporate Finance and Governance: General, IDB-WP-276, Macro-prudential policies, Financial crises, Systemic risk, Financial Risk Management, economic policy,
Online Access:	http://dx.doi.org/10.18235/0011345 https://publications.iadb.org/en/endogenous-risk-amplification-effects-financial-systems-and-macro-prudential-policies
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