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

Posted: 14 Dec 2011

See all articles by Giovanni Majnoni

Giovanni Majnoni

affiliation not provided to SSRN

Andrew Powell

Inter-American Development Bank (IDB); Universidad Torcuato Di Tella - School of Business; Harvard University - Center for International Development (CID)

Date Written: November 2011

Abstract

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.

Suggested Citation

Majnoni, Giovanni and Powell, Andrew P. and Powell, Andrew P., On Endogenous Risk, the Amplification Effects of Financial Systems and Macro Prudential Policies (November 2011). IDB Working Paper No. IDB-WP-276, Available at SSRN: https://ssrn.com/abstract=1972114

Giovanni Majnoni

affiliation not provided to SSRN

Andrew P. Powell

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina
+5411 4787-9349 (Phone)
+5411 4783-3220 (Fax)

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Harvard University - Center for International Development (CID) ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

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