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Financial InnovationToo Much or Too Little?$
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Michael Haliassos

Print publication date: 2013

Print ISBN-13: 9780262018296

Published to MIT Press Scholarship Online: January 2015

DOI: 10.7551/mitpress/9780262018296.001.0001

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Financial Markets: Productivity, Procyclicality, And Policy

Financial Markets: Productivity, Procyclicality, And Policy

(p.191) 9 Financial Markets: Productivity, Procyclicality, And Policy
Financial Innovation

Michael Haliassos

The MIT Press

Financial markets play an instrumental role in the efficient allocation of productive resources and are an important factor for long-run economic growth. However, recent financial crises have demonstrated that finance can exacerbate the trade-off between economic efficiency and macroeconomic stability. Financial markets can facilitate the accumulation of debt in good times, leading to a mutually reinforcing dynamic between the real and the financial sector whereby the financial system amplifies the business cycle and generates financial instability. This capacity has in the past been manifested in a host of feedback mechanisms, such as procyclical capital and collateral requirements, procyclical financial innovation, or pro-cyclical risk-taking and compensation schemes. Increasing the resilience of the financial sector without endangering its capacity to sustain economic activity is an important aspect of the tasks that the newly established macroprudential regulators on both sides of the Atlantic are charged with.

Keywords:   Financial markets, Economic growth, Instability, Procyclicality, Macro-prudential policy

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