Tài liệu Circuit theory of finance and the role of incentives in financial sector reform

Circuit theory of finance and the role of incentives in financial sector reform


by


Biagio Bossone


World Bank


November 1998


Summary


This paper analyzes the role of the financial system for economic growth and stability, and
addresses a number of core policy issues for financial sector reforms in emerging economies. The
role of finance is studied in the context of a circuit model with interacting rational, forward-
looking, and heterogeneous agents. Finance is shown to essentially complement the price system
in coordinating decentralized intertemporal resource allocation choices from agents operating
under limited information and incomplete trust. The paper also discusses the links between
finance and incentives to efficiency and stability in a circuit context. It assesses the implications
for financial sector reform policies and identifies incentives and incentive-compatible institutions
for financial sector reform strategies in emerging economies.


The author is intellectually indebted to the work of Prof. Augusto Graziani in the field of
monetary circuit theory. The author wishes to thank Jerry Caprio, Stjin Claessens, and Larry
Promisel for their helpful comments on earlier drafts of the paper. He bears full responsibility for
any remaining errors and for the opinions expressed in the text. The author is especially grateful
to his wife Ornella for her invaluable support. For comments, contact Biagio Bossone, E-mail:
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