American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Bank Bailouts, International Linkages, and Cooperation
American Economic Journal: Economic Policy
vol. 5,
no. 4, November 2013
(pp. 270–305)
Abstract
Financial institutions are increasingly linked internationally. As a result, financial crises and government intervention have stronger effects beyond borders. We provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation losses, and intra- and intercountry income inequality, in the noncooperative game between governments there are inefficiencies due to externalities, a lack of burden sharing, and free riding. We show that, in absence of cooperation, stronger interbank linkages make government interests diverge, whereas cross-border asset holdings tend to align them. We analyze different forms of cooperation and their effects on global and national welfare.Citation
Niepmann, Friederike, and Tim Schmidt-Eisenlohr. 2013. "Bank Bailouts, International Linkages, and Cooperation." American Economic Journal: Economic Policy, 5 (4): 270–305. DOI: 10.1257/pol.5.4.270JEL Classification
- C72 Noncooperative Games
- G01 Financial Crises
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation
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