Stiglitz

Question 1

Aims of stigitz

Answer 1

Clearify the link between fin system and macroecon

1. micro models of fin –> different market str.
2. Apply these micro models to fin based macro levels to achieve the reasons behind:
   - bussiness cycles fluctations
   - determinants of growth
3. International capital flows:
   - CA convertibilty
   - response to crisis

Question 2

Fin markets benefits

Answer 2

1. Accumulated capital –> increased returns to scale
2. allocating to the most efficient use
3. monitoring the use
4. transfers, pools, reduces risk
5. increases liquidity
6. conveys info

Question 3

Different characteristics of the fin market

Answer 3

1. uncertainity
2. type of borrower
3. actions of borrower
4. production, processing, distribution, utilization of info
5. govn intervention neccessary

Question 4

Adv and Disadv of Equity

Answer 4

Adv:
1. share risks with investors
2. no fixed obligation
3. not encouraging to take risks
4. no costly bankruptcies
Disadv
1. equity rationing
2. adverse selection 
3. moral hazard (majority vs minority)
4. indistinguishable equities (real or money diverter)
5. different prices of control block and regular equities

Question 5

Adv and Disadv of SR Loans

Answer 5

Adv
1. Expected return is tied between borrower and lender
2. Banks have more power to monitor
Disadv
1. Differerent risk incentives
2. Adverse selection
3. Moral hazard
4. Credit rationing

Question 6

What is credit rationing? what is the underlying reason?

Answer 6

i increases --> more risky borrowers --> do not increase i --> no market clearance
one instrument (price) three goals:
-market clearence
- right mix of borrowers
- right levels of risk taking

Question 7

Adv and Disadv Bonds

Answer 7

Lies between short term and equity
Adv: the firm can implement long term policies
Disadv: can adversely effect the bondholders

Question 8

Adv and Disadv Secondary Markets

Answer 8

Adv
1. Incresed liquidity
2. Diversification
3. + info
Disadv
1. Increased volatility
2. Private rent seeking disturbs public good

Question 9

The models without a serios integration of Fin System are unable to explain…(empirical weaknesses)

Answer 9

1. Real effects of Shocks: transmission, amplification, persistence
2. Large impact of supply shocks
3. the relationship between i and Y
4. movements in inventories
5. Sector diversification

Question 10

The models without a serios integration of Fin System are unable to explain…(theoretical weaknesses)

Answer 10

1. Unconvincing micro foundations: full emp and unemp

2. Cannot summarize impact of fin markets with money demand eqn

Question 11

Fin based models

Answer 11

• Firms are risk averse because of equity rationing

- investment cost redefined: (i)+marginal cost of bankruptcy

Question 12

Marginal cost of bankruptcy effected by

Answer 12

1. equity position
2. cash flow
3. risk

Question 13

Banks and credit rationing

Answer 13

Banks are also risk averse
risk increases –> safer treasury bills –> funds decrease –> i increase –> credit rationing works
- Monetary policy works through credit channel
- Monetary channel basis questioned
- i vs Y varies
- large Y movements occur with little movement in r

Question 14

Why monetary basis questioned

Answer 14

• money bears i
• most transactions became moneyless
• most transactions as an asset exchange do not generate income

Question 15

What is the problem with SR loans

Answer 15

• Volatility
• High cost of econ disruption
• cost of sterilization

Question 16

How to reduce vulnerability to capital volatility

Answer 16

Traditional policies
- good macro policy
- sound regulation
- transarency
Composition policies
- eliminate distortive SR
- risk based capital adequacy standards
- chilean type restrictions
- tax policy

Question 17

Restructuring crisis

Answer 17

• maintain credit flows
• do not decrease net worths
• preserve info and organisational capital