Financial Restraint: Towards a New Paradigm

Hellmann, Thomas, Murdock, Kevin and Stiglitz, Joseph (1997) Financial Restraint: Towards a New Paradigm. In: Aoki, M., Kim, H-K. and Okuno-Fujiwara, M., (eds.) The Role of Government in East Asian Economic Development Comparative Institutional Analysis. Clarendon Press, Oxford, pp. 163-207. ISBN 978-0198294917


This paper examines a set of financial policies, called financial restraint, that address financial market stability and growth in an initial environment of low financial deepening.
Unlike with financial repression, where the government extracts rents from the private sector, financial restraint calls for the government to create rent opportunities in the private sector. These rent opportunities induce outcomes that are more efficient than either financial repression or laissez-faire policies. It is argued that deposit rate controls and restrictions on competition create franchise value in financial markets that curtails moral hazard behavior among financial intermediaries. Lending rate controls may also increase the efficiency of intermediation by reducing agency cost in loan markets.

Item Type: Book Section
Keywords: finance
Subject(s): Entrepreneurship
Centre: Entrepreneurship Centre
Date Deposited: 17 Aug 2015 13:02
Last Modified: 26 Sep 2018 15:04
Funders: not applicable

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