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Bank Bailouts, International Linkages, and Cooperation

Author

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  • Friederike Niepmann
  • Tim Schmidt-Eisenlohr

Abstract

Financial institutions are increasingly linked internationally. As a result, financial crises and government intervention have stronger effects beyond borders. We provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation losses, and intra- and intercountry income inequality, in the noncooperative game between governments there are inefficiencies due to externalities, a lack of burden sharing, and free riding. We show that, in absence of cooperation, stronger interbank linkages make government interests diverge, whereas cross-border asset holdings tend to align them. We analyze different forms of cooperation and their effects on global and national welfare.

Suggested Citation

  • Friederike Niepmann & Tim Schmidt-Eisenlohr, 2013. "Bank Bailouts, International Linkages, and Cooperation," American Economic Journal: Economic Policy, American Economic Association, vol. 5(4), pages 270-305, November.
  • Handle: RePEc:aea:aejpol:v:5:y:2013:i:4:p:270-305
    Note: DOI: 10.1257/pol.5.4.270
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • G01 - Financial Economics - - General - - - Financial Crises
    • 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

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