Uncertainty as Commitment

Jaromir Nosal and Guillermo Ordonez

No 18766, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Time-inconsistency of no-bailout policies can create incentives for banks to take excessive risks and generate endogenous crises when the government cannot commit. However, at the outbreak of financial problems, usually the government is uncertain about their nature, and hence it may delay intervention to learn more about them. We show that intervention delay leads to strategic restraint banks endogenously restrict the riskiness of their portfolio relative to their peers in order to avoid being the worst performers and bearing the cost of such delay. These novel forces help to avoid endogenous crises even when the government cannot commit. We analyze the effect of government policies from the perspective of this new result.

JEL-codes: D53 D8 D81 D83 E44 E58 G21 G33 G34 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-ban and nep-cdm
Note: CF EFG ME
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Citations: View citations in EconPapers (10)

Published as Nosal, Jaromir B. & Ordoñez, Guillermo, 2016. "Uncertainty as commitment," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 124-140.

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Journal Article: Uncertainty as commitment (2016)
Working Paper: Uncertainty as commitment (2013)
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