Governing the Financial System: A Theory of Financial Resilience

47 Pages Posted: 8 Dec 2017

See all articles by Alexander William Salter

Alexander William Salter

Texas Tech University - Rawls College of Business; American Institute for Economic Research

Vlad Tarko

University of Arizona - Department of Political Economy and Moral Science

Date Written: November 8, 2017

Abstract

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

Suggested Citation

Salter, Alexander William and Tarko, Vlad, Governing the Financial System: A Theory of Financial Resilience (November 8, 2017). Mercatus Working Paper, November 2017. Available at SSRN: https://ssrn.com/abstract=3084352 or http://dx.doi.org/10.2139/ssrn.3084352

Alexander William Salter (Contact Author)

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

HOME PAGE: http://awsalter.com

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

Vlad Tarko

University of Arizona - Department of Political Economy and Moral Science ( email )

Tucson, AZ
United States

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