Time - Consistent Bailout Plans
Bailout policy is time-inconsistent, which results in multiple equilibria characterized by too much leverage, high risk correlation and little liquidity holding. I show that a long-run horizon allows the policy-maker to define bailout plans that rule out the worse equilibria. This result contrasts with the standard finding in environments with a unique equilibrium, as in most applications, in which a long-run horizon allows the policy-maker to support superior outcomes in equilibrium. I use this framework to discuss the effectiveness of three prudential policy proposals: too-big-to-fail size caps, taxes on borrowing and liquidity requirements. I also argue that policies alleviating the time-inconsistency of bailouts may generate large welfare gains. In this regard, I discuss three alternatives: policies against the scarcity of liquidity during crises, bailout design, and public debt.
Year of publication: |
2011-07
|
---|---|
Authors: | Pastén, Ernesto |
Institutions: | Banco Central de Chile |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Curva de Beveridge, Vacantes y Desempleo: Chile 1986-2002.II
Belani, Dolly, (2002)
-
Coordination of Expectations and the Informational Role of Policy
Lu, Yang, (2013)
-
Policy Design with Private Sector Skepticism in the Textbook New Keynesian Model
King, Robert, (2014)
- More ...