Destructive effects of constructive ambiguity in risky times
AbstractUnclear bailout policy, underinvestment and calls for greater responsibility by bankers are some of the observations from the recent financial crisis. The paper explains underinvestment as an inefficient equilibrium. Under ambiguous bailout policy agents suffer from a lack of information about the insolvency resolution methods. The beliefs of bankers regarding whether an insolvent bank is liquidated, may differ from those of depositors even if bankers and depositors possess absolutely symmetric information about the economy. This disrupts the flow of funds through the banking channel if the investment climate is characterized by high aggregate risk. The paper suggests policy implications aimed at a reduction of the anxiety of agents and at aligning their beliefs to restore efficiency.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 31 (2012)
Issue (Month): 6 ()
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Web page: http://www.elsevier.com/locate/inca/30443
Bank bailouts; Constructive ambiguity; Policy communication;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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