Financial instability, political crises and contagion
AbstractThis paper studies banking liquidity crises under the assumption that the government may have private benefits in bailing-out a collapsing banking sector for reputation concerns. This political distortion feeds political uncertainty, as citizens may not agree with a bailout decision and overthrow the government. This paper shows that higher political uncertainty increases both fînancial and political instabilities as it enlarges the set of parameters for which bank runs and the dismissal of the government are optimal. Higher political uncertainty may stern from the occurrence of a politico-financial crisis in another similar country. Contagion takes place if citizens update their beliefs on the type of their government. Doing so, they may reinforce their beliers that the government is self-interested and bank bailouts are not socially optimal.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2007041.
Date of creation: 01 Dec 2007
Date of revision:
Banking liquidity crisis; bailout; political crisis; contagion;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- G2 - Financial Economics - - Financial Institutions and Services
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
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