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The middle ground, the Goldilocks region, is turbulent. This finding, unlike the usual unidirectional relationships in the literature, implies that countries should either allow few large global banks to dominate their credit markets or minimize their exposure to global banking. It is at moderate levels of market power at which global banks (unlike domestic banks that only lend locally) substantially reallocate funds across countries and generate high volatility. The reason is that increasing (decreasing) loans causes a sharper decrease (increase) in global banks' returns in the economy where they have high market power. When global banks have higher/lower market power in one economy than the others, they don't shift funds across countries by as much in response to shocks, and the economies become more stable with robust lending. This paper is the first to show that advanced economies are least stable when the market power of global banks in these economies are neither too high nor too low.

Goldilocks economy bernanke