A Conceptual Framework for Analyzing the Financial Environment

WP#95-062

Posted: 25 Aug 1998  

Zvi Bodie

Boston University - Department of Finance & Economics

Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit

Abstract

This paper develops a conceptual framework for analyzing the global financial system. The framework has two major objectives: to address differences in institutional structure across borders and to explain changes in these institutional structures over time. Applicability of the framework ranges widely, from analysis of the entire financial system to individual business strategy decisions and specific public policy choices. It rests on two basic premises:

-Financial functions are more stable than financial institutions-that is, functions vary less across borders and change less over time.

-Competition will cause evolution in institutional structures to produce greater efficiency in the performance of financial system functions. That is, institutional form follows its function.

The evolution of the financial system is portrayed as an innovation spiral in which organized markets and intermediaries compete with each other in a static sense and complement each other in a dynamic sense.

JEL Classification: G1, G2

Suggested Citation

Bodie, Zvi and Merton, Robert C., A Conceptual Framework for Analyzing the Financial Environment. WP#95-062. Available at SSRN: https://ssrn.com/abstract=6638

Zvi Bodie (Contact Author)

Boston University - Department of Finance & Economics ( email )

United States

HOME PAGE: http://www.zvibodie.com

Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
E62-634
Cambridge, MA 02139-4307
United States
617 715 4866 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6678 (Phone)

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