Working Paper: NBER ID: w18587
Authors: Javier Bianchi
Abstract: We develop a quantitative equilibrium model of financial crises to assess the interaction between ex-post interventions in credit markets and the buildup of risk ex ante. During a systemic crisis, bailouts relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. We find that moral hazard effects are limited if bailouts are systemic and broad-based. If bailouts are idiosyncratic and targeted, however, this makes the economy significantly more exposed to financial crises.
Keywords: Bailouts; Financial Crises; Risk-Taking; Moral Hazard; Quantitative Equilibrium Model
JEL Codes: E2; E20; E3; E32; E44; E6; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bailouts (H81) | economic recovery (E65) |
| Bailouts (H81) | investment behavior (G11) |
| Bailouts (H81) | consumption (E21) |
| Bailouts (H81) | higher wages and dividends (J31) |
| Anticipation of bailouts (G28) | risk-taking behavior (D91) |
| risk-taking behavior (D91) | financial crises (G01) |
| Broad-based bailouts (H81) | limited moral hazard effects (G52) |
| Idiosyncratic bailouts (H81) | overborrowing (H74) |
| Idiosyncratic bailouts (H81) | more severe crises (H12) |
| Optimal bailouts (H81) | substantial output gains (E23) |