Bank Bailouts: Moral Hazard vs. Value Effect

ByEduardo Levy Yeyati, Tito Cordella

August 1, 1999

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper shows that a central bank, by announcing and committing ex-ante to a bailout policy that is contingent on the realization of certain states of nature (for example on the occurrence of an adverse macroeconomic shock), creates a risk-reducing “value effect” that more than outweighs the moral hazard component of such a policy.

Subject: Banking, Deposit insurance, Deposit rates, Lender of last resort, Moral hazard

Keywords: central bank, WP

Pages:
30
Volume:
1999
DOI:
https://doi.org/10.5089/9781451852875.001
Issue:
106
Series:
Working Paper No. 1999/106
Stock No:
WPIEA1061999
ISBN:
9781451852875
ISSN:
1018-5941

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