Asset purchase bailouts and endogenous implicit guarantees

Eric Mengus

Journal of International Economics, 2023, vol. 142, issue C

Abstract: This paper provides a theory of endogenous implicit guarantees on risky assets, in which a government’s bailouts take the form of asset purchases to alleviate asymmetric information on private liquidity needs. As a result of asymmetric information, direct transfers to agents are imperfect so that, when more constrained agents are also more exposed to a given asset, asset purchases by the government are optimal. When anticipated, this form of bailouts leads to an endogenous implicit guarantee premium so that otherwise risky assets can be traded as if there are risk-free. This possibility of implicit guarantee is amplified by other financial frictions such as risk-shifting. Finally, I show how this form of bailouts can shed light on the buildup of the euro area's sovereign debt crisis.

Keywords: Implicit guarantees; Bailouts; Euro area's sovereign debt crisis (search for similar items in EconPapers)
JEL-codes: E44 F34 G28 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Asset Purchase Bailouts and Endogenous Implicit Guarantees (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:142:y:2023:i:c:s0022199623000235

DOI: 10.1016/j.jinteco.2023.103737

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