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"This paper analyses how the risk-sharing capacity of the financial system varies over the business cycle, leading to procyclical fragility. We show how financial imperfections contribute to underinsurance by entrepreneurs, generating an externality that leads to the build-up of systematic risk during upturns. Increased asset price uncertainty emerges as a symptom of the sectoral concentration that builds up during booms. The liquidity of the collateral asset is shown to play a key role in amplifying the financial cycle. The welfare costs of financial stability, in terms of the efficiency costs due to financial frictions and the volatility costs due to amplification, are also illustrated."--Bank of England web site.
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Procyclicality, collateral values, and financial stability
2006, Bank of England
electronic resource /
in English
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Edition Notes
Title from PDF file as viewed on Oct. 16, 2006
Includes bibliographical references.
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.
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