To bail-out or to bail-in? Answers from an agent-based model

Peter Klimek (), Sebastian Poledna, J. Farmer and Stefan Thurner

Journal of Economic Dynamics and Control, 2015, vol. 50, issue C, 144-154

Abstract: Since the beginning of the 2008 financial crisis almost half a trillion euros have been spent to financially assist EU member states in taxpayer-funded bail-outs. These crisis resolutions are often accompanied by austerity programs causing political and social friction on both domestic and international levels. The question of how to resolve failing financial institutions, and how this depends on economic preconditions, is therefore a pressing and controversial issue of vast political importance. In this work we employ an agent-based model to study the economic and financial ramifications of three highly relevant crisis resolution mechanisms. To establish the validity of the model we show that it reproduces a series of key stylized facts of the financial and real economy. The distressed institution can either be closed via a purchase & assumption transaction, it can be bailed-out using taxpayer money, or it may be bailed-in in a debt-to-equity conversion. We find that for an economy characterized by low unemployment and high productivity the optimal crisis resolution with respect to financial stability and economic productivity is to close the distressed institution. For economies in recession with high unemployment the bail-in tool provides the most efficient crisis resolution mechanism. Under no circumstances do taxpayer-funded bail-out schemes outperform bail-ins with private sector involvement.

Keywords: Agent-based model; Bail-in; Bail-out; Crisis resolution (search for similar items in EconPapers)
JEL-codes: G21 G33 G38 H3 H30 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (60)

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Working Paper: To bail-out or to bail-in? Answers from an agent-based model (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:50:y:2015:i:c:p:144-154

DOI: 10.1016/j.jedc.2014.08.020

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