The Redistributive Effects of Financial Deregulation
IMF Working Papers, December 17, 2013
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- The Redistributive Effects of Financial Deregulation
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Bibliographic details
- Authors: Anton Korinek, Jonathan Kreamer
- Published: December 17, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475546088.001
Overview and purpose
- Authors: Anton Korinek, Jonathan Kreamer
- Date: December 17, 2013
- Paper series: IMF Working Papers, Working Paper No. 2013/247
- Pages: 42
- DOI: https://doi.org/10.5089/9781475546088.001
- ISBN: 9781475546088
- ISSN: 1018-5941
- Central aim: place the distributive implications of financial regulation at the center of analysis rather than framing regulation solely as a question of economic efficiency.
Model and analytical framework
- Structure:
- A model in which the financial sector benefits from risk-taking by earning greater expected returns.
- Risk-taking increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy.
- A Pareto frontier is described along which different levels of risk-taking map into different levels of welfare for the financial sector and the rest of the economy.
- Regulator’s problem:
- Must trade off efficiency in the financial sector (aided by deregulation) against efficiency in the real economy (aided by tighter regulation and a more stable supply of credit).
Key findings
- Risk-taking yields higher expected returns for the financial sector but generates larger probability of severe losses that produce credit crunches.
- Credit crunches impose negative externalities on the real economy, reducing welfare outside the financial sector.
- Financial deregulation can reallocate surplus toward the financial sector at the expense of the rest of the economy.
- The trade-off between sectoral efficiencies can be represented along a Pareto frontier showing mutually exclusive welfare outcomes for the two parties.
Mechanisms that enable or encourage greater risk-taking
- Financial innovation.
- Asymmetric compensation schemes.
- Concentration in the banking system.
- Bailout expectations.
Distributional implications
- The mechanisms above allocate greater surplus to the financial sector and reduce surplus available to the rest of the economy.
- Deregulation, through the channels identified, shifts the distribution of welfare between the financial sector and other economic agents.
Subject areas and keywords (as listed)
- Subject: Banking, Credit, Economic sectors, Financial crises, Financial institutions, Financial sector, Labor, Money, Stocks, Wages
- Keywords: bailout expectation, bank capital, capital investment, capital requirement, Credit, credit crunch, Distributive Conflict, expected return, Financial Regulation, Financial sector, Growth of the Financial Sector, Introducing bailout transfer, market power, policies center stage, Rent Extraction, Stocks, transfer policy, Wages, WP
IMF Working Paper No. 2013/247 — Anton Korinek and Jonathan Kreamer, "The Redistributive Effects of Financial Deregulation", December 17, 2013, Pages: 42, Volume: 2013, DOI: https://doi.org/10.5089/9781475546088.001