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Government guarantees and financial stability

2018 Elsevier Inc. All rights reserved. This manuscript is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Licence http://creativecommons.org/licenses/by-nc-nd/4.0 ;ISSN: 0022-0531 ;EISSN: 1095-7235

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  • Title:
    Government guarantees and financial stability
  • Author: Allen, HF ; Carletti, E ; Goldstein, I ; Leonello, A
  • Subjects: 1401 Economic Theory ; Economic Theory
  • Description: Banks are intrinsically fragile because of their role as liquidity providers. This results in under-provision of liquidity. We analyze the effect of government guarantees on the interconnection between banks' liquidity creation and likelihood of runs in a global-game model, where banks' and depositors' behavior are endogenous and affected by the amount and form of guarantee. The main insight of our analysis is that guarantees are welfare improving because they induce banks to improve liquidity provision, although that sometimes increases the likelihood of runs or creates distortions in banks' behavior.
  • Publisher: Elsevier
  • Creation Date: 2018-06
  • Language: English
  • Identifier: ISSN: 0022-0531
    EISSN: 1095-7235
  • Source: Spiral
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