What about increasing unemployment benefits for the young?

Claudio Michelacci, Hernán Ruffo 18 November 2014

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It is well known that workers suffer when they lose their job and experience an unemployment spell – surveys indicate a sharp decrease in happiness, and average consumption falls by around 20% upon job displacement. And much research has studied how to efficiently insure workers against the risk of unemployment. Like any other insurance mechanism, unemployment insurance involves a trade-off between the gains from providing liquidity and insurance to unemployed workers and the cost of the implicit problem of moral hazard.

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Topics:  Labour markets

Tags:  unemployment, insurance, happiness, Unemployment insurance, unemployment benefits, moral hazard, replacement rates, human capital, life cycle

Adverse selection and moral hazard in the Japanese public credit guarantee schemes for SMEs

Kuniyoshi Saito, Daisuke Tsuruta 14 November 2014

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Credit rationing caused by capital market imperfections is widely seen as an important phenomenon in the loan market, especially for small and medium enterprises (SMEs). Among various ways of alleviating the problem, credit guarantee schemes are one of the most important policy tools in many countries. An economic rationale for such public intervention is that it can enhance efficiency by providing additional funds for SMEs that are in fact healthy but unable to secure enough loans because of the informational gap between lenders and borrowers.

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Topics:  Financial markets

Tags:  credit rationing, SMEs, credit, public guarantees, Japan, capital markets, asymmetric information, moral hazard, adverse selection, loan guarantees, insurance

Ballooning finance

Bruno Biais, Jean-Charles Rochet, Paul Woolley 21 August 2014

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One of the curiosities of the modern economy is why the finance sector is so large. Economists have only recently sought to document and ponder this phenomenon. Empirically, Greenwood and Scharfstein (2013) find that, in the US, financial services, which accounted for 2.8% of GDP in 1950, made up 8.3% of GDP in 2006.

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Topics:  Financial markets

Tags:  securitisation, financial crises, moral hazard, asymmetric information, financial innovation, global crisis, bubbles, monitoring, shirking, junk bonds, CDOs, CDSs, ETFs

Lessons for rescuing a SIFI: The Banque de France’s 1889 ‘lifeboat’

Pierre-Cyrille Hautcoeur, Angelo Riva, Eugene N. White 02 July 2014

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In the aftermath of the 2008 financial crisis, the Dodd-Frank Act of 2010 set out to limit the authority of the Federal Reserve to rescue insolvent financial institutions. Since 1932, Section 13(3) of the Federal Reserve Act had given the agency the power to lend to “any individual partnership, or corporation” in “unusual and exigent circumstances.” The 2010 Act now compels the Fed to consult with the Secretary of the Treasury before implementing a new lending program.

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Topics:  Economic history Financial markets

Tags:  Central Banks, financial crises, moral hazard, lender of last resort, bailout, bank runs, SIFIs, central banking, Banque de France

Gambling for resurrection in Iceland

Friðrik Már Baldursson, Richard Portes 06 January 2014

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The demise of the three large Icelandic banks, just after the fall of Lehman Brothers, was a key event in the spread of the financial crisis. A couple of weeks before its collapse in October 2008, Kaupthing bank announced that the Qatari investor Sheikh Mohammed Bin Khalifa Bin Hamad al-Thani had bought a 5.01% stake. This briefly boosted market confidence in Kaupthing (Financial Times 2008). What market participants did not know was that Kaupthing illegally financed the deal, which was without risk to al-Thani.

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Topics:  Financial markets

Tags:  Iceland, financial crisis, moral hazard, banking, banks, gambling for resurrection

Joint liability in international lending: A proposal for amending the Treaty of Lisbon

Kaushik Basu, Joseph Stiglitz 02 January 2014

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The sovereign debt crisis exposed weaknesses in the Eurozone’s financial architecture that may not have been fully anticipated when the founding treaties of the Eurozone were drafted. Key among these weak spots are the provisions of the Treaty of Lisbon which regulate intergovernmental debt obligations and preclude direct financing of sovereigns by the ECB.

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Topics:  EU institutions International finance

Tags:  eurozone, Maastricht Treaty, sovereign debt, moral hazard, Lisbon Treaty, Eurozone crisis, no-bailout clause

A game changer: The EU banking recovery and resolution directive

Thomas Huertas, María J Nieto 19 September 2013

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To end moral hazard and “too big to fail”, investors, not taxpayers, should bear the loss associated with bank failures. Recently, ECOFIN took a major step in this direction. It agreed a common position with respect to the Banking Recovery and Resolution Directive. If confirmed in the trialogue with the Commission and the European Parliament, the Directive will:

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Topics:  Financial markets

Tags:  moral hazard, Too big to fail, banks

Coping with financial crises: Latin American answers to European questions

Eduardo Cavallo, Eduardo Fernandez-Arias 17 October 2012

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Many peripheral Eurozone countries are suffering from financial and competitiveness problems reminiscent of previous Latin American challenges. The analogy has been noticed many times.

In a recent paper (Cavallo and Fernandez-Arias 2012), we focus on selected areas in which the Latin American experience with crisis and recovery offers useful lessons for today’s European concerns, namely high public debt risk premium, distress in the banking system, sudden stops of capital flows, and low growth and competitiveness.

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Topics:  Global crisis

Tags:  Latin America, moral hazard, Eurozone crisis

A failsafe way to end the Eurozone crisis

Charles Wyplosz 26 September 2011

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The annual gathering of finance ministers and central bank governors at the IMF/World Bank meetings in Washington seems to have been an epiphany for Eurozone leaders. Finally, there seems to be agreement that their July 2011 agreement was insufficient (Reuters 2011).

In a previous Vox column, I sketched a way of stopping the public debt crisis that is engulfing the Eurozone (Wyplosz 2011). Here I develop this idea into a coherent proposal that, if adopted, would immediately stop the rot.

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Topics:  Global crisis

Tags:  ECB, moral hazard, Eurozone crisis, EFSF, debt guarantee

Crisis contracts

Hans Gersbach 02 April 2011

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There is anything but a dearth of proposals on how banks and bank-related financial institutions could be more stringently regulated and monitored by the government with a view to avoiding the recurrence of a crippling crisis like the one we have been labouring under for the past two years (e.g. Perotti and Suarez 2011 and Danielsson 2011 on this site).

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Topics:  Financial markets Global crisis International finance

Tags:  moral hazard, financial regulation, Bankers’ bonuses

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