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Financial intermediaries may increase economic efficiency through intertemporal risk smoothing. However without an adequate regulation, intermediation may fail to do this. This paper studies the effects of a production shock in a closed economy and compares abilities of market-based and...
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Banking regulators often practice forbearance and ambiguity in insolvency resolutions. The paper examines the effects … stochastic policy mix lead to suboptimal allocations if banks do not internalize insolvency costs. The policy of forbearance may …
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