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Financial Safety Nets

Author

Listed:
  • Julien Bengui
  • Javier Bianchi
  • Louphou Coulibaly

Abstract

In this paper, we study the optimal design of financial safety nets under limited private credit. We ask when it is optimal to restrict ex ante the set of investors that can receive public liquidity support ex post. When the government can commit, the optimal safety net covers all investors. Introducing a wedge between identical investors is inefficient. Without commitment, an optimally designed financial safety net covers only a subset of investors. Compared to an economy where all investors are protected, this results in more liquid portfolios, better social insurance, and higher ex ante welfare. Our result can rationalize the prevalent limited coverage of safety nets, such as the lender of last resort facilities.

Suggested Citation

  • Julien Bengui & Javier Bianchi & Louphou Coulibaly, 2016. "Financial Safety Nets," Staff Report 535, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:535
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    File URL: https://www.minneapolisfed.org/research/sr/sr535.pdf
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    Other versions of this item:

    • Julien Bengui & Javier Bianchi & Louphou Coulibaly, 2019. "Financial Safety Nets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(1), pages 105-132, February.

    References listed on IDEAS

    as
    1. Javier Bianchi, 2016. "Efficient Bailouts?," American Economic Review, American Economic Association, vol. 106(12), pages 3607-3659, December.
    2. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    4. Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February.
    5. Emmanuel Farhi & Mikhail Golosov & Aleh Tsyvinski, 2009. "A Theory of Liquidity and Regulation of Financial Intermediation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(3), pages 973-992.
    6. Acharya, Viral V. & Schnabl, Philipp & Suarez, Gustavo, 2013. "Securitization without risk transfer," Journal of Financial Economics, Elsevier, vol. 107(3), pages 515-536.
    7. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-388, May.
    8. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 146-175.
    9. Pierre Yared, 2013. "Public Debt Under Limited Private Credit," Journal of the European Economic Association, European Economic Association, vol. 11(2), pages 229-245, April.
    10. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    11. Nosal, Jaromir B. & Ordoñez, Guillermo, 2016. "Uncertainty as commitment," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 124-140.
    12. Todd Keister, 2016. "Bailouts and Financial Fragility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(2), pages 704-736.
    13. Borys Grochulski & Yuzhe Zhang, 2015. "Optimal Liquidity Regulation With Shadow Banking," Working Paper 15-12, Federal Reserve Bank of Richmond.
    14. repec:hal:spmain:info:hdl:2441/hqvfahst79ekpe0losvq1h46k is not listed on IDEAS
    15. Xavier Freixas, 1999. "Optimal bail out policy, conditionality and constructive ambiguity," Economics Working Papers 400, Department of Economics and Business, Universitat Pompeu Fabra.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Mengus, Eric, 2023. "Asset purchase bailouts and endogenous implicit guarantees," Journal of International Economics, Elsevier, vol. 142(C).
    2. Borys Grochulski & Yuzhe Zhang, 2019. "Optimal liquidity policy with shadow banking," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(4), pages 967-1015, November.
    3. Bengui, Julien & Bianchi, Javier, 2022. "Macroprudential policy with leakages," Journal of International Economics, Elsevier, vol. 139(C).

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    More about this item

    Keywords

    Public liquidity provision; Bailouts; Safety nets; Time inconsistency;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • 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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