NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Has Financial Development Made the World Riskier?

Raghuram G. Rajan

NBER Working Paper No. 11728
Issued in November 2005
NBER Program(s):   CF   IFM

Developments in the financial sector have led to an expansion in its ability to spread risks. The increase in the risk bearing capacity of economies, as well as in actual risk taking, has led to a range of financial transactions that hitherto were not possible, and has created much greater access to finance for firms and households. On net, this has made the world much better off. Concurrently, however, we have also seen the emergence of a whole range of intermediaries, whose size and appetite for risk may expand over the cycle. Not only can these intermediaries accentuate real fluctuations, they can also leave themselves exposed to certain small probability risks that their own collective behavior makes more likely. As a result, under some conditions, economies may be more exposed to financial-sector-induced turmoil than in the past. The paper discusses the implications for monetary policy and prudential supervision. In particular, it suggests market-friendly policies that would reduce the incentive of intermediary managers to take excessive risk.

download in pdf format
   (342 K)

email paper

This paper is available as PDF (342 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11728

Published: Raghuram G. Rajan, 2005. "Has financial development made the world riskier?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 313-369.

Users who downloaded this paper also downloaded these:
Rajan w17760 The Corporation in Finance
Diamond and Rajan w16994 Illiquid Banks, Financial Stability, and Interest Rate Policy
Acharya and Rajan w17542 Sovereign Debt, Government Myopia, and the Financial Sector
Diamond and Rajan w14739 The Credit Crisis: Conjectures about Causes and Remedies
Taylor w14631 The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us