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An Evolutionary Analysis of Financial Innovation and Regulation
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TitleAn Evolutionary Analysis of Financial Innovation and Regulation  
AuthorXu Wenbin, Zhao Lin and Lee Jevons  
OrganizationSchool of Economics, Xiamen University;Department of Economics, Duke University;Freeman School of Business, Tulane University;; 
Key WordsFinancial Regulation; Financial Innovation; Co-evolution; Nonlinear Dynamics 
AbstractIn this paper we discuss the diffusion and co-evolution of financial innovation with regulation, using the evolutionary economics ideology and nonlinear dynamics methodology. By constructing a series of dynamic models we find 3 different co-evolutionary paths of financial innovation and regulation on condition of 3 different regulation strategies, and we prove that the so-called ‘first-order derivative’ regulation strategy, which means the gradual proceeding of regulatory rules in pace with the diffusion of financial innovation, is the only strategy of the three that could possibly fulfill regulatory objectives while keeping market stable. Then we take business cycle into consideration, and prove that the ‘first-order derivative’ regulation strategy is still the best strategy for financial authority to play, but the influence of business cycle is in no way to counter-acted. An important enlightenment for public policy makers is given accordingly, that the only way to keep financial market stable is to closely follow the market and to implement a stable and expectable policy framework. 
Serial NumberWP1386 
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