Governing the Financial System: A Theory of Financial Resilience
47 Pages Posted: 8 Dec 2017
Date Written: November 8, 2017
We develop a theory of financial stability based on insights from the literature on polycentric governance and institutional resilience. We contend that top-down regulatory approaches to achieving financial stability will prove ineffective, due to various knowledge and incentive problems. In contrast, a polycentric banking system contains an evolved and mutually compatible set of overlapping rules that align incentives and generate knowledge, promoting financial stability. In short, bottom-up approaches to financial stability are institutionally resilient; top-down approaches are not. We conclude our analysis by framing our contribution in light of Nobel laureate E. Ostrom’s “design principles” for robust governance institutions.
Keywords: central banking, Elinor Ostrom, financial crisis, financial regulation, free banking, monocentric, polycentric, resilience
JEL Classification: E42, E44, E58, G28, P16
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