Financial Safety Nets

Julien Bengui, Javier Bianchi and Louphou Coulibaly

No 535, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: 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.

Keywords: Public liquidity provision; Bailouts; Safety nets; Time inconsistency (search for similar items in EconPapers)
JEL-codes: E58 E61 G28 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2016-08-25
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mic
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Related works:
Journal Article: FINANCIAL SAFETY NETS (2019)
Working Paper: Financial Safety Nets (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:535

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