Bundesbank paper finds misbehaving banks increase volatility
Output becomes more volatile when depositors cannot hold bankers to account
Researchers at the Deutsche Bundesbank have designed a model that implies misbehaviour by banks increases the volatility of output when depositors cannot fully hold them to account.
The discussion paper, Imperfect information about financial frictions and consequences for the business cycle, by Josef Hollmayr and Michael Kühl, designs a model based on rational expectations except when it comes to banks. Bank managers seek to divert resources in their own favour, and depositors can only observe
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