How a Bank Bailout may Increase Systemic Risk

Victoria Miller ()

International Economic Journal, 2012, vol. 26, issue 4, 541-546

Abstract: In 2008--2009, the US government spent trillions of dollars to bailout its financial system and prevent insolvency due to a deterioration in domestic loan portfolios. The following dips in US bond prices suggest that global investors feared that the US was over-extending itself and might be unable to repay its debt with taxes rather than inflation. The paper illustrates that if uncertainty arises about a large government's ability to raise taxes to repay its debt, then a debt-financed bailout which initially restores bank health may inadvertently contribute to the financial system's ultimate demise if banks are important lenders to a foreign country that pegs its currency to the domestic money.

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:taf:intecj:v:26:y:2012:i:4:p:541-546

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DOI: 10.1080/10168737.2011.616521

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