Prudential Policies and Bailouts: A Delicate Interaction

Ernesto Pasten

Review of Economic Dynamics, 2020, vol. 38, 181-197

Abstract: Could prudential policies backfire by making the lack of commitment problem of bailouts worse? This commitment problem refers to the excessive risk taken by banks and financial institutions in expectations of bailouts if crises occur, which in turn increase financial fragility and the severity of crises. Ex-ante policies, such as prudential policies, have a variety of effects on the various components of the ex-post incentives of an authority to implementing a bailout. Thus, the interaction between prudential policies and bailouts is delicate: In different conditions, a given prudential policy may backfire or increase its effectiveness by worsening or alleviating the lack of commitment problem of bailouts. Liquidity requirements and prudential taxes are examples of prudential policies that may backfire. Public debt is an example of an ex-ante policy usually with no prudential motivation that may play such a role. (Copyright: Elsevier)

Keywords: Lack of commitment problem; Bailouts; Monetary policy; Prudential Policy (search for similar items in EconPapers)
JEL-codes: E44 E52 E61 G38 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://dx.doi.org/10.1016/j.red.2020.04.003
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See https://www.sciencedirect.com/ for details.

Related works:
Working Paper: Prudential Policies and Bailouts - A Delicate Interaction (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:issued:18-431

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/j.red.2020.04.003

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().