Moral Hazard Effects of Bailing out under Asymmetric Information
No 789, CESifo Working Paper Series from CESifo Group Munich
With a four-stage sequential game model, we study how bailouts ameliorate the effects of liquidation on fundamentals, reduce the likelihood of currency crises and affect the financial sector's (non-observable) effort. In stage 1, exchange rate regime is announced and all agents receive probabilistic information that a shock may occur in stage 4. Here, the government can commit to an optimal bailout or may wait until stage 4 when a bad shock may occur. The private sector in stage 2 forms exchange rate expectations, and decides on investments and effort. In stage 3, the government faces costs due to expectations of devaluation and liquidation, and may decide to pre-emptively abandon its exchange rate policy. We show that commitment decisions have very important implications for the agents' optimal decisions.
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
http://www.cesifo-group.de/portal/page/portal/DocB ... -10/cesifo_wp789.pdf (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: http://EconPapers.repec.org/RePEc:ces:ceswps:_789
Access Statistics for this paper
More papers in CESifo Working Paper Series from CESifo Group Munich Poschingerstrasse 5, 81679 Munich. Contact information at EDIRC.
Series data maintained by Julio Saavedra ().