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The risk of deflation

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  • Gerlach, Stefan

Abstract

Introduction: The onset of financial instability in August 2007, which quickly spread across the world, raises a number of questions for policy makers. First, what are the roots of the crisis? Many factors have been emphasized in the debate, including the opacity of complex financial products; the excessive confidence in ratings; weak risk management by financial institutions; massive reliance on wholesale funding; and the presumption that markets would always be liquid. Furthermore, poorly understood incentive effects – arising from the originate-to-distribute-model, remuneration policies and the period of low interest rates – are also widely seen as having played a role. Second, how can a repetition of the crisis can be avoided? Much attention is being focused on regulation and supervision of financial intermediaries. The G-20, at its summit in November 2008, noted that measures need to be taken in five areas: (i) financial market transparency and disclosure by firms need to be strengthened; (ii) regulation needs to be enhanced to ensure that all financial markets, products and participants are regulated or subject to oversight, as appropriate; (iii) the integrity of financial markets should be improved by bolstering investor and consumer protection, avoiding conflicts of interest, and by promoting information sharing; (iv) international cooperation among regulators must be enhanced; and (v) international financial institutions must be reformed to reflect changing economic weights in the world economy better in order to increase the legitimacy and effectiveness of these institutions...

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  • Gerlach, Stefan, 2009. "The risk of deflation," IMFS Working Paper Series 21, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
  • Handle: RePEc:zbw:imfswp:21
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    1. Roman Inderst & Manuel Klein, 2007. "Innovation, endogenous overinvestment, and incentive pay," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 881-904, December.
    2. Inderst, Roman, 2010. "Misselling (financial) products: The limits for internal compliance," Economics Letters, Elsevier, vol. 106(1), pages 35-37, January.
    3. Roman Inderst, 2008. "'Irresponsible Lending' With A Better Informed Lender," Economic Journal, Royal Economic Society, vol. 118(532), pages 1499-1519, October.
    4. Roman Inderst & Holger M. Mueller & Felix Münnich, 2006. "Financing a Portfolio of Projects," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1289-1325.
    5. Roman Inderst & Holger M. Mueller, 2010. "CEO Replacement Under Private Information," The Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 2935-2969, August.
    6. Inderst, Roman & Mueller, Holger M., 2009. "Early-stage financing and firm growth in new industries," Journal of Financial Economics, Elsevier, vol. 93(2), pages 276-291, August.
    7. Inderst, Roman & Mueller, Holger M., 2008. "Bank capital structure and credit decisions," Journal of Financial Intermediation, Elsevier, vol. 17(3), pages 295-314, July.
    8. Inderst, Roman, 2009. "Loan origination under soft- and hard-information lending," IMFS Working Paper Series 27, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).

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