Investor Moral Hazard and ECB Monetary Policy Response

Abstract

This paper develops a model of ECB bailout response to the European sovereign debt markets. The model shows that the ECBs’ approach to bailouts helped prevent investor moral hazard by helping to add a distortion. This research seeks to answer the question: Was the ECB able to abate the Moral Hazard when performing a bailout. This research finds that the ECB, through the use of a voting mechanism, was generally able to abate the moral hazard when performing the bailout during the 2007 European Sovereign Debt Crisis.