English, Article, Journal or magazine article edition: Optimal Bail Out Policy, Conditionality and Creative Ambiguity Xavier Freixas

User activity

Share to:
 
Bookmark: http://trove.nla.gov.au/version/44977
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Optimal Bail Out Policy, Conditionality and Creative Ambiguity
Author
  • Xavier Freixas
Physical Description
  • preprint
Notes
  • This paper addresses the issue of the optimal behaviour of the Lender of Last Resort (LOLR) in its microeconomic role regarding individual financial institutions in distress. It has been argued that the LOLR should not intervene at the microeconomic level and let any defaulting institution face the market discipline, as it will be confronted with the consequences of the risks it has taken. By considering a simple cost benefit analysis we show that this position my lack a sufficient foundation. We establish that, instead, under reasonable assumptions, the optimal policy has to be conditional on the amount of uninsured debt issued by the defaulting bank. Yet in equilibrium, because the rescue policy is costly, the LOLR will not rescue all the banks that fulfil the uninsured debt requirement condition, but will follow a fixed strategy. This we interpret as the confirmation of the ¶creative ambiguity¶ principle, perfectly in line with the central bankers claim that it is efficient for them to have discretion in lending to individual institutions. Alternatively, in other cases, when the social cost of a banks bankruptcy is too high, it is optimal for the LOLR to bail out the institution, and this gives support to the ¶too big to fail¶ policy.
  • RePEc:fmg:fmgdps:dp327
Language
  • English
Contributed by
OAIster

Get this edition

Other links

  • Set up My libraries

    How do I set up "My libraries"?

    In order to set up a list of libraries that you have access to, you must first login or sign up. Then set up a personal list of libraries from your profile page by clicking on your user name at the top right of any screen.

  • All (1)
  • Unknown (1)
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.

User activity


e.g. test cricket, Perth (WA), "Parkes, Henry"

Separate different tags with a comma. To include a comma in your tag, surround the tag with double quotes.

Be the first to add a tag for this edition

Be the first to add this to a list

Comments and reviews

What are comments? Add a comment

No user comments or reviews for this version

Add a comment