The Redistributive Effects of Financial Deregulation

 
Author/Editor: Anton Korinek ; Jonathan Kreamer
 
Publication Date: December 17, 2013
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation center stage. We develop a model in which the financial sector benefits from risk-taking by earning greater expected returns. However, risktaking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. We describe a Pareto frontier along which different levels of risktaking map into different levels of welfare for the two parties. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to the financial sector at the expense of the rest of the economy.
 
Series: Working Paper No. 13/247
Subject(s): Financial sector | Banks | Capital | Economic models

 
English
Publication Date: December 17, 2013
ISBN/ISSN: 9781475546088/2227-8885 Format: Paper
Stock No: WPIEA2013247 Pages: 42
Price:
US$18.00 (Academic Rate:
US$18.00 )
 
 
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