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Bank bailouts: moral hazard vs. value effect

  • Cordella, Tito
  • Yeyati, Eduardo Levy

This paper shows that a central bank, by announcing and committing ex-ante to a bailout policy that is contingent on the realization of certain states of nature (for example on the occurrence of an adverse macroeconomic shock), creates a risk-reducing “value effect” that more than outweighs the moral hazard component of such a policy.

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File URL: http://www.sciencedirect.com/science/article/B6WJD-49G5R1R-6/2/45945710794ce2f30df0d54be27671bd
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Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 12 (2003)
Issue (Month): 4 (October)
Pages: 300-330

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Handle: RePEc:eee:jfinin:v:12:y:2003:i:4:p:300-330
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622875

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  11. Philippe Aghion, Patrick Bolton & Steven Fries, 1999. "Optimal Design of Bank Bailouts: The Case of Transition Economies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 51-, March.
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  15. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
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  19. Rajan, Raghuram G, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 399-441, May.
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