Efficient bailouts?

No 133, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

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 relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. The optimal policy requires, in general, a mix of ex-post intervention and ex-ante prudential policy. We also analyze the effects of bailouts on financial stability and welfare in the absence of ex-ante prudential policy. Our results show that the moral hazard effects of bailouts are significantly mitigated by making bailouts contingent on the occurrence of a systemic financial crisis.

Keywords: Business cycles; Financial markets; Regulation (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Efficient Bailouts? (2016)
Working Paper: Efficient Bailouts? (2016)
Working Paper: Efficient Bailouts? (2012)
Working Paper: Efficient Bailouts? (2012)
Working Paper: Efficient Bailouts? (2012)
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