Working Paper: CEPR ID: DP3742
Authors: Marc Flandreau
Abstract: This Paper argues that the backbone of the pre-1914 international financial architecture was the concern about moral hazard. No decentralized system can leave without safeguards against free riding and this typically means that problem countries must find by themselves the means to fix their domestic problems. We review the origins of crises as well as the remedies that were commonly applied one century ago and find that the international financial world was fairly similar to the setting in which we live today, and this for the same reasons. Today, just like one century ago, in the absence of an international lender of last resort with huge regulatory powers, countries must muddle through, with the occasional - and imperfect - help of international finance.
Keywords: financial architecture; financial crises; moral hazard; relationship banking; self-insurance
JEL Codes: F02; G14; N10; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of an international lender of last resort (F65) | countries independently manage their domestic financial crises (F65) |
| fiscal misconduct (E62) | financial instability (F65) |
| financial crises (G01) | exchange rate depreciation (F31) |
| moral hazard (G52) | belief that only the fittest nations will survive financial turmoil (F52) |
| relationships between bankers and states (G21) | effectiveness of financial assistance during crises (H84) |
| crises (H12) | specific fiscal and monetary policies (E63) |