Beyond Pangloss: Financial sector origins of inefficient economic booms

• 成果类型: Article
• 署名作者: Malherbe, Frederic; Mcmahon, Michael
• 署名单位: University of London; University College London; University of London; University College London; Centre for Economic Policy Research - UK; University of Oxford
• 刊物名称: JOURNAL OF MONETARY ECONOMICS
• ISSN/ISSBN: 0304-3932
• DOI: 10.1016/j.jmoneco.2024.103558
• 发表日期: 2024
• 关键词: investment; Bank guarantees; Financial engineering

摘要

Government guarantees of bank liabilities have a long-standing history and are now ubiquitous. We study a model where financial sophistication enhances banks' ability to exploit government guarantees and fuels inefficient economic booms. Driven by financial engineering, bank rent extraction creates a disconnect between lending decisions and borrower repayment prospects: In equilibrium, banks over-lend and only break-even courtesy of trading book profit. Exploitability is affected not only by financial sophistication but also by regulation. Given the pattern for regulatory changes in the last few decades, we posit that the Great Recession, partly, reversed a Great Distortion.