Working Paper: NBER ID: w21201
Authors: Miguel Faria-e-Castro; Joseba Martinez; Thomas Philippon
Abstract: We study the optimal use of disclosure and fiscal backstops during financial crises. Providing information can reduce adverse selection in credit markets, but negative disclosures can also trigger inefficient bank runs. In our model governments are thus forced to choose between runs and lemons. A fiscal backstop mitigates the risk of runs and allows a government to pursue a high disclosure strategy. Our model explains why governments with strong fiscal positions are more likely to run informative stress tests, and, paradoxically, how they can end up spending less than governments that are more fiscally constrained.
Keywords: financial crises; information disclosure; fiscal capacity; bank runs; adverse selection
JEL Codes: E44; E5; E6; G01; G21; G28; H12; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Strong fiscal capacity (E62) | More aggressive stress tests (E44) |
| More aggressive stress tests (E44) | Reduced need for bailouts (G28) |
| Weak fiscal positions (H69) | Less information disclosure (D82) |
| Less information disclosure (D82) | Increased reliance on bailouts (G28) |
| Strong fiscal capacity (E62) | More robust disclosure (G38) |
| More robust disclosure (G38) | Alleviates adverse selection in credit markets (D82) |
| Weak fiscal positions (H69) | Increased bank runs (E44) |
| Fiscal capacity (E62) | Bank runs (E44) |