Toxic Economic Theory and Global Recession
It can lead to a misallocation of resources and sub-optimal investment behaviour because, in an economic upturn, non-viable projects may get financed, while in a downturn even very promising projects may be rejected. In addition, systemic risk could increase, an illustration being the fuelling of an asset bubble during economic upturns through generous credit conditions and higher collateral values. The subsequent bursting of the bubble may result in a banking crisis and a credit crunch.
[European Central Bank, Monthly Bulletin, February 2004, p.78]
KeywordsMonetary Policy Moral Hazard Downside Risk Banking Crisis Banking Supervision
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