Efficient Bailouts?
American Economic Review · 2016 · Volume 106 · Issue 12
Abstract
We develop a quantitative equilibrium model of financial crises to assess the interaction between ex post interventions in credit markets and the buildup 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. We find that moral hazard effects are limited if bailouts are systemic and broad-based. If bailouts are idiosyncratic and targeted, however, this makes the economy significantly more exposed to financial crises.
Keywords
Macroeconomics: Production, Business Fluctuations, Cycles, Financial Markets and the Macroeconomy, Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy, Financial Crises, Banks, Depository Institutions, Micro Finance Institutions, Mortgages, Financial Institutions and Services: Government Policy and Regulation
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