Financial innovation and risk in the financial system

Abstract

In this paper, I address the stability of the financial system. In normal times, the financial sector reduces financial friction and increase aggregate production. However, in crisis periods, the instability of the financial system increases aggregate fluctuation. In this sense, financial stability is critical in maintaining stable economic growth. In the first chapter, I analyze the effect of macroprudential policies that were introduced to maintain stability of the financial system and the whole economy. In the second chapter, I investigated how the loss in the housing market led to the malfunctioning of the financial sector. In the third chapter, I suggested a new mechanism through which the financial friction and the production chain network can jointly amplify idiosyncratic shock and increase aggregate fluctuation. My goal is to shed more light on the sources of financial instability and how to overcome such risks.