Federal Reserve Bank of Minneapolis
Financial Safety Nets
In this paper, we study the optimal design of financial safety nets under limited private credit. We ask when it is optimal to restrict ex ante the set of investors that can receive public liquidity support ex post. When the government can commit, the optimal safety net covers all investors. Introducing a wedge between identical investors is inefficient. Without commitment, an optimally designed financial safety net covers only a subset of investors. Compared to an economy where all investors are protected, this results in more liquid portfolios, better social insurance, and higher ex ante welfare. Our result can rationalize the prevalent limited coverage of safety nets, such as the lender of last resort facilities.
Cite this item
Julien Bengui & Javier Bianchi & Louphou Coulibaly, Financial Safety Nets, Federal Reserve Bank of Minneapolis, Staff Report 535, 25 Aug 2016.
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
Keywords: Bailouts; Safety nets; Time inconsistency; Public liquidity provision
This item with handle RePEc:fip:fedmsr:535
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