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Efficient Bailouts?

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  • Javier Bianchi

    (NYU and Wisconsin)

Abstract

This paper develops a non-linear DSGE model to assess the interaction between ex-post interventions in credit markets and the build-up of risk ex ante. During a systemic crisis, bailouts to the financial sector relax balance sheet constraints and accelerate the economic recovery. 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 the optimal intervention in the economy requires a bailout of around two percentage points of GDP during a credit crunch. We also show how bailouts may increase financial fragility in the absence of prudential policy.

Suggested Citation

  • Javier Bianchi, 2012. "Efficient Bailouts?," 2012 Meeting Papers 162, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:162
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    References listed on IDEAS

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    Cited by:

    1. Keiichiro Kobayashi & Tomoyuki Nakajima, 2014. "A macroeconomic model of liquidity crises," KIER Working Papers 876, Kyoto University, Institute of Economic Research.
    2. Ozlem Akin & José Montalvo & Jaume García Villar & José-Luis Peydró & Josep Raya, 2014. "The real estate and credit bubble: evidence from Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, pages 223-243.
    3. Nosal, Jaromir B. & Ordoñez, Guillermo, 2016. "Uncertainty as commitment," Journal of Monetary Economics, Elsevier, pages 124-140.
    4. Kollmann, Robert & Ratto, Marco & Roeger, Werner & in′t Veld, Jan, 2013. "Fiscal policy, banks and the financial crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 387-403.
    5. repec:eee:macchp:v2-1641 is not listed on IDEAS
    6. Fornaro, Luca, 2015. "Financial crises and exchange rate policy," Journal of International Economics, Elsevier, pages 202-215.
    7. Vincenzo Cuciniello & Federico M. Signoretti, 2015. "Large Banks, Loan Rate Markup, and Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 11(3), pages 141-177, June.
    8. Luca Fornaro, 2012. "Financial Crises and Exchange Rate Policy," 2012 Meeting Papers 726, Society for Economic Dynamics.
    9. Anton Korinek & Olivier Jeanne, 2013. "Macroprudential Regulation Versus Mopping Up After the Crash," 2013 Meeting Papers 405, Society for Economic Dynamics.
    10. repec:eee:finsta:v:33:y:2017:i:c:p:71-80 is not listed on IDEAS
    11. Pierpaolo GIANNOCCOLO & José Manuel MANSILLA-FERNÁNDEZ, 2017. "Bank Restructuring, Competition, and Lending Supply: Evidence from the Spanish Banking Sector," Departmental Working Papers 2017-16, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    12. Borovicka, J. & Hansen, L.P., 2016. "Term Structure of Uncertainty in the Macroeconomy," Handbook of Macroeconomics, Elsevier.
    13. Anton Korinek & Olivier Jeanne, 2013. "Macroprudential Regulation Versus Mopping Up After the Crash," 2013 Meeting Papers 405, Society for Economic Dynamics.
    14. Piero Gottardi & Atsushi Kajii & Tomoyuki Nakajima, 2016. "Constrained Inefficiency and Optimal Taxation with Uninsurable Risks," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(1), pages 1-28, February.
    15. Keiichiro Kobayashi & Tomoyuki Nakajima, 2014. "A macroeconomic model of liquidity crises," KIER Working Papers 876, Kyoto University, Institute of Economic Research.
    16. Bental, Benjamin & Demougin, Dominique, 2016. "Privatizing profits and socializing losses with smoothly operating capital markets," European Journal of Political Economy, Elsevier, vol. 44(C), pages 179-194.

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    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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