Market failures - rationale in era of globalisation, Microeconomics

Market failures (even when they do not have international external effects)

i) Self-fulfilling bank runs, government debt runs, currency crises.

ii) Liquidation costs of liquidity or semi-liquidity crises that results in runs.

iii) Excessive liquidation costs (i., the avoidable liquidation costs on top of the unavoidable ones) in insolvency crises where there are also runs.

iv) "Conditionality lending" as a way to resolve two coordination issues: need to design appropriate policy changes based on independent  and superior information (thousands of creditors cannot do it) cost - when no private creditor is large enough and risk-neutral enough in a crisis to do that (as uncoordinated creditors rush to the exist) conditionality lending is a form on "delegated monitoring and coordination mechanisms" when there are "multiple principles" for the debtor agent.

v) Reducing the adjustment costs (need for how adjustment and stock adjustment and costly macro/structural reforms) for countries with serious underperformance and policy shortcomings.

vi) Need to actively coordinate debtor and creditors action in crisis management (resolution because of collective action problems (rush to exists, such to courthouse, holdout / tree rider problems) between creditors and between the debtors and its creditors including IMF pushing for appropriate policy regime changes.

vii) Possible provision of lender of last resort support to domestic banking systems that are informally or formally ‘dollarised'. As more countries ‘dollarise', ‘euroise', join monetary and currency unions or are informally dollarised, domestic monetary authorities cannot provide such bender or last resort support.

Posted Date: 11/9/2012 6:32:17 AM | Location : United States







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