Abstract
Governments sometimes bail out banks by recapitalizing them, or by offering to insure their liabilities. The government’s goal may be to rescue borrowers, bankers, or depositors, and economists have developed rationales why each of these constituencies may merit protection (e.g., Diamond, 2001). These potential benefits have to be weighed against the costs of a bailout, which are typically thought to be the damage to long-run incentives that such intervention engenders. In this paper, we present a different effect of bank bailouts: Bank bailouts alter the availability of aggregate liquidity in the economy. While a well-targeted bailout can help rescue an otherwise collapsing banking system (see Diamond and Rajan, 2001a), a poorly targeted bailout can even tip a banking system into a systemic crisis. This (ex post crisis) cost of bank bailouts, to the best of our knowledge, has not been examined elsewhere and is the focus of this paper.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
