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Federal Reserve Bank of Minneapolis
Working Papers
Efficient Bailouts?
Javier Bianchi

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.

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Javier Bianchi, Efficient Bailouts?, Federal Reserve Bank of Minneapolis, Working Papers 730, 19 Jan 2016.
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Keywords: Bailouts; Moral hazard; Credit crunch; Financial shocks; Macroprudential policy
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