A Reinterpretation of the Gordon and Barro Model in Terms of Financial Stability

A government bailout model based on the framework of time-consistent mone- tary policy of Barro and Gordon (1983) is developed. In the model, the banking sector and the government play a game where the former chooses a bailout expec- tation whereas the later reacts by choosing its optimal bailout policy. The banking sector is assumed to be perfectly competitive, aiming only at anticipating the bailout policy. An excess of credit ensues and firms over-invest, which can be amended by an appropriately chosen reserve requirement. The government faces a trade-off be- tween efficiency and stability in trying to minimize the costs of intervention.


Issue Date:
Aug 12 2014
Publication Type:
Working or Discussion Paper
DOI and Other Identifiers:
Record Identifier:
https://ageconsearch.umn.edu/record/182483
PURL Identifier:
http://purl.umn.edu/182483
Total Pages:
9
JEL Codes:
G1; G2; G3
Series Statement:
Finance
F14_6




 Record created 2017-04-01, last modified 2020-10-28

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