Nobel Prize for Economy

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Key contributions-

The 2022 Nobel prize laureates in economic sciences significantly improved our understanding of the role of banks in the economy, particularly during financial crises, as well as how to regulate financial markets, 

Diamond and Dybvig-

• They developed theoretical models that explain why banks exist, how their role in society makes them vulnerable to rumours about their impending collapse and how society can lessen this vulnerability.
• The duo presented a solution to bank vulnerability, in the form of deposit insurance from the government. 
• When depositors know that the state has guaranteed their money, they no longer need to rush to the bank as soon as rumours start about a bank run.
• Diamond also showed how banks perform a societally important function. 
• As intermediaries between savers and borrowers, banks are better suited to assessing borrowers’ creditworthiness and ensuring that loans are used for good investments.

Ben Bernanke-

• He analysed the Great Depression of the 1930s, the worst economic crisis in modern history. 
• Among other things, he showed how bank runs were a decisive factor in the crisis becoming so deep and prolonged.
• Using historical sources and statistical methods, Bernanke’s analysis showed which factors were important in the drop in gross domestic product. 

• He found factors that were directly linked to failing banks accounted for the lion’s share of the downturn.

• The work done by the trio has been crucial to subsequent research that has enhanced our understanding of banks, bank regulation, banking crises and how financial crises should be managed.
• The trio’s research reduces the risk of financial crises developing into long-term depressions with severe consequences for society.

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