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Destructive effects of constructive ambiguity in risky times

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  • Vinogradov, Dmitri

Abstract

Unclear 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.

Suggested Citation

  • Vinogradov, Dmitri, 2012. "Destructive effects of constructive ambiguity in risky times," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1459-1481.
  • Handle: RePEc:eee:jimfin:v:31:y:2012:i:6:p:1459-1481
    DOI: 10.1016/j.jimonfin.2012.02.011
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Bank for International Settlements, 2011. "Global liquidity - concept, measurement and policy implications," CGFS Papers, Bank for International Settlements, number 45.
    2. Eijffinger, Sylvester C W & Nijskens, Rob, 2012. "A dynamic analysis of bank bailouts and constructive ambiguity," CEPR Discussion Papers 8953, C.E.P.R. Discussion Papers.
    3. repec:eee:reveco:v:50:y:2017:i:c:p:122-135 is not listed on IDEAS
    4. Marcin Jerzy Michalski & Michael Bowe & Olga Kolokolova, 2016. "Systemic risk, interbank market contagion, and the lender of last resort function," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Combining micro and macro data for financial stability analysis, volume 41 Bank for International Settlements.
    5. Marina Doroshenko & Ian Miles & Dmitri Vinogradov, 2013. "Knowledge Intensive Business Services As Generators Of Innovations," HSE Working papers WP BRP 12/STI/2013, National Research University Higher School of Economics.
    6. Nijskens, Rob, 2014. "A sheep in wolf’s clothing: Can a central bank appear tougher than it is?," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 94-103.

    More about this item

    Keywords

    Bank bailouts; Constructive ambiguity; Policy communication;

    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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