Working Paper: CEPR ID: DP17812
Authors: Toni Ahnert; Caio Machado; Ana Pereira
Abstract: Government interventions such as bailouts are often implemented in times of high uncertainty. Policymakers may therefore rely on information from financial markets to guide their decisions. We study a model in which a policymaker learns from market activity and traders have high private stakes in the intervention. We discuss how the presence of such traders affects intervention outcomes, and show that it reduces market informativeness and the efficiency of bailouts. Regarding normative implications, we show that a higher social cost of interventions and a gradual implementation of assistance can improve market informativenessand raise overall welfare.
Keywords: bailouts; market informativeness; trading; real efficiency
JEL Codes: D83; G12; G14; G18; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Informed traders with high stakes (G14) | Reduced market informativeness (G14) |
| Higher social cost of interventions (H43) | Improved market informativeness (G14) |
| Higher social cost of interventions (H43) | Improved welfare (I39) |
| Gradual implementation of assistance (F35) | Enhanced market informativeness (G14) |
| Gradual implementation of assistance (F35) | Enhanced welfare (I38) |