Expectations vs. fundamentals: Does the cause of banking panics matter for prudential policy?

Vijay Narasiman and Todd Keister
Additional contact information
Vijay Narasiman: Harvard Business School

No 1235, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: There is a long-standing debate about whether banking panics and other financial crises always have fundamental causes or are sometimes the result of self-fulfilling beliefs. Disagreement on this point would seem to present a serious obstacle to designing policies that promote financial stability. We show that in some cases the appropriate choice of policy is invariant to the underlying cause of banking panics. We study an environment in which the anticipation of being bailed out in the event of a crisis distorts the incentives of financial institutions and their investors. We compare two policies that aim to correct this distortion: restricting policy makers from engaging in bailouts, and allowing bailouts but taxing the short-term liabilities of financial institutions. We show that the latter policy yields higher equilibrium welfare regardless of whether or not panics are sometimes caused by self-fulfilling beliefs.

Date: 2014
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
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:sed014:1235

Access Statistics for this paper

More papers in 2014 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().