Moral Hazard Misconceptions: the Case of the Greenspan Put

Gideon Bornstein and Guido Lorenzoni ()

No 24050, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Policy discussions on financial market regulation tend to assume that whenever a corrective policy is used ex post to ameliorate the effects of a crisis, there are negative side effects in terms of moral hazard ex ante. This paper shows that this is not a general theoretical prediction, focusing on the case of monetary policy interventions ex post. In particular, we show that if the central bank does not intervene by monetary easing following a crisis, this creates an aggregate demand externality that makes borrowing ex ante inefficient. If instead the central bank follows the optimal discretionary policy and intervenes to stabilize asset prices and real activity, we show examples in which the aggregate demand externality disappears, reducing the need for ex ante intervention.

JEL-codes: E52 E61 G38 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG ME
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Published as Gideon Bornstein & Guido Lorenzoni, 2018. "Moral Hazard Misconceptions: The Case of the Greenspan Put," IMF Economic Review, vol 66(2), pages 251-286.

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Journal Article: Moral Hazard Misconceptions: The Case of the Greenspan Put (2018)
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