Year: 2016
Type: article
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. (JEL E23, E32, E44, E63, G01, G21, G28)
Source: American Economic Review
DOI: 10.1257/aer.20121524
Author: Javier Bianchi
Institution: Federal Reserve Bank of Minneapolis
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4246933914