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Projects - Details  
  Stability of the Global Financial System: Regulation and Policy Response
 

Researchers
Professor Hyun Shin
Professor C A E Goodhart
Dr J Danielson
Dr A Dasgupta
Dr Z P Zigrand
London School of Economics


Contact
Professor Hyun Shin
Financial Markets Group Research Centre
London School of Economics
Houghton Street
London
WC2A 2AE

Tel: 020 7955 7891
email: h.s.shin@lse.ac.uk


Duration of Research
April 2005 - March 2008

Background
The world has experienced a series of financial crises in recent years, each unfolding in one emerging market country with knock-on effects elsewhere around the globe. Beginning with Mexico in late 1994, crisis-stricken countries have included Thailand, Korea, Indonesia, Russia, Brazil, Turkey and most recently, Argentina. In each case, the crisis had roots in macroeconomic policies (fiscal, monetary, and exchange rate policies) and microeconomic policies (supervision and regulation of financial markets, and industrial policy). These policies formed the backdrop of the crisis, and policymakers struggled to find the appropriate response that would restore economic order, limit contagion effects, and shore-up confidence in financial markets. Not enough has been learned about the dynamics of and appropriate responses to such crises, and critical questions remain:

What are the precise mechanisms that make systemic financial crises so devastating?

What principles should crisis management policy follow? In particular, how should monetary policy be conducted?

How can regulation be better designed so as to balance stability and efficiency of financial markets?

How can the institutions governing the global financial system be reformed to promote well-functioning capital markets?

Systemic crises feed on the endogenous amplification of financial distress through collateral constraints, declines in market values of assets, currency mismatches on the balance sheet, and limited liquidity. The precise channels of propagation of the crisis determine the appropriate policy response ex post, and also the appropriate preventative regulatory measures ex ante. This project proposes a programme of concentrated research that will shed light the causes and dynamics of crises, and hence on the correct policies, both ex ante and ex post. There are implications for the debate on the reform of the institutions of the global financial system.

 
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Last updated November 2005
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