Dynamic Coordination and Intervention Policy

Lin Cong, Steven Grenadier and Yunzhi Hu
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Steven Grenadier: Stanford University
Yunzhi Hu: University of Chicago

Research Papers from Stanford University, Graduate School of Business

Abstract: We model a dynamic economy with strategic complementarity among investors and a government that intervenes as a large player in global games to mitigate coordination failures. We establish existence and uniqueness of equilibrium, and show interventions affect coordination both contemporaneously and dynamically. Initial intervention alters public information structure that could either facilitate or hamper subsequent coordination. Our results suggest that even absent signaling, optimal policy should emphasize early intervention. Moreover, considering dynamic coordination increases or decreases endogenous intervention, depending on the intervention capacities. Our paper is applicable to intervention programs such as the bailouts of money market mutual funds and commercial paper market during the 2008 financial crisis.

JEL-codes: D81 D83 G01 G28 O33 (search for similar items in EconPapers)
Date: 2016-01
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