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Efficient Bailouts?

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  • Javier Bianchi

Abstract

We develop a quantitative equilibrium model of financial crises to assess the interaction between ex-post interventions in credit markets and the buildup of risk ex ante. During a systemic crisis, bailouts relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. We find that moral hazard effects are limited if bailouts are systemic and broad-based. If bailouts are idiosyncratic and targeted, however, this makes the economy significantly more exposed to financial crises.

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  • Javier Bianchi, 2016. "Efficient Bailouts?," Working Papers 730, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:730
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    References listed on IDEAS

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    More about this item

    Keywords

    Bailouts; Moral hazard; Credit crunch; Financial shocks; Macroprudential policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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