Financial Innovation, Diffusion, and Instability

Abstract

Financial innovations are associated with market crises. Hyman Minsky singles out financial innovations as particularly prone to instability so as to necessitate governmental intervention. Processes of innovation and diffusion in new products and in new financial instruments have commonalities as well as differences. This paper focuses on the differences with a view to better understand why financial innovations are more likely to generate significant negative repercussions. Differences that distinguish financial innovations include the role of intermediaries, variability in quality, and the extent of externalities. This paper further discusses the implications of these differences.

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