Banking Policy and Macroeconomic Stability: An Exploration
Whether and when does banking serve to stabilize the economy? The authors view the banking system as a filter through which foreign and domestic shocks feed through to the domestic economy. The filter can dampen or amplify the shocks through variou...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2002/06/1942076/banking-policy-macroeconomic-stability-exploration http://hdl.handle.net/10986/14290 |
| Summary: | Whether and when does banking serve to
stabilize the economy? The authors view the banking system
as a filter through which foreign and domestic shocks feed
through to the domestic economy. The filter can dampen or
amplify the shocks through various credit market channels,
including credit growth, import of foreign capital, and
possibly interest rates. The question is whether the
prudential quality of banking, as proxied by measures of
regulatory quality and openness to foreign banking, amplify
or dampen these shocks. The authors find that many of the
regulatory characteristics that have been found to deepen a
financial system and make it more robust to crises-notably
those which empower the private sector-also appear to reduce
the sector's ability to provide short-term insulation
to the macro-economy. It is as if prudent bankers are
reluctant to absorb short-term risks that, if neglected,
might cause solvency and growth problems in the longer run.
Forbearance might dampen short-term volatility, but at the
expense of the longer run health of the banking sector and
the economy. One way to avoid this apparent tradeoff is
evident: banking systems which have a higher share of
foreign-owned banks, a feature already associated with
financial deepening and lowered risk of crisis, also seem to
score well in terms of short-term macroeconomic insulation. |
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