A Reinterpretation of the Gordon and Barro Model in Terms of Financial Stability

Danilo Lopomo Beteto Wegner

No 182483, Risk and Sustainable Management Group Working Papers from University of Queensland, School of Economics

Abstract: A government bailout model based on the framework of time-consistent mone- tary policy of Barro and Gordon (1983) is developed. In the model, the banking sector and the government play a game where the former chooses a bailout expec- tation whereas the later reacts by choosing its optimal bailout policy. The banking sector is assumed to be perfectly competitive, aiming only at anticipating the bailout policy. An excess of credit ensues and firms over-invest, which can be amended by an appropriately chosen reserve requirement. The government faces a trade-off be- tween efficiency and stability in trying to minimize the costs of intervention.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 9
Date: 2014-08-12
New Economics Papers: this item is included in nep-cba
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uqsers:182483

DOI: 10.22004/ag.econ.182483

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