Malherbe, Frederic;
McMahon, Michael;
(2024)
Beyond Pangloss: Financial sector origins of inefficient economic booms.
Journal of Monetary Economics
10.1016/j.jmoneco.2024.103558.
(In press).
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Abstract
Government guarantees of bank liabilities have a long-standing history and are now ubiquitous. We study a model where financial sophistication enhances banks’ ability to exploit government guarantees and fuels inefficient economic booms. Driven by financial engineering, bank rent extraction creates a disconnect between lending decisions and borrower repayment prospects: In equilibrium, banks over-lend and only break-even courtesy of trading book profit. Exploitability is affected not only by financial sophistication but also by regulation. Given the pattern for regulatory changes in the last few decades, we posit that the Great Recession, partly, reversed a Great Distortion.
| Type: | Article |
|---|---|
| Title: | Beyond Pangloss: Financial sector origins of inefficient economic booms |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1016/j.jmoneco.2024.103558 |
| Publisher version: | https://doi.org/10.1016/j.jmoneco.2024.103558 |
| Language: | English |
| Additional information: | Copyright © 2024 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/). |
| Keywords: | Investment; Bank guarantees; Financial engineering |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10186417 |
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