| Summary: |
Financial innovation comes in three stages: credit innovation (new instruments or assets accepted as collateral); financial asset markets; and financial derivatives. Accepting assets as collateral makes markets in those assets more liquid. Variations in the liquidity of markets gives rise to fluctuations in the prices of assets which then induce the emergence of instruments to fix the money values of those assets. This is an endogenous process, rather than being a response to regulation. Developing countries may need to provide finance for industrial development. But they do not need the most advanced financial innovations.
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