Abstract

http://ssrn.com/abstract=1297456
 
 

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Flight to Quality and Bailouts: Policy Remarks and a Literature Review


Ricardo J. Caballero


Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Pablo D. Kurlat


Stanford University - Department of Economics

October 9, 2008

MIT Department of Economics Working Paper No. 08-21

Abstract:     
Flight to quality episodes involve a combination of extreme risk- or uncertainty-aversion, weaknesses in the balance sheets of key financial intermediaries, and strategic or speculative behavior, that increases credit spreads on all but the safest and most liquid assets. Unlike previous episodes, the entire U.S. financial system is currently at the center of the trouble, with no safe haven pockets, which may lead to greater real effects. The U.S. government's credit is still impeccable, which facilitates policies in support of the financial system. Policy must take into account incentives for behavior during the crisis, discouraging excessive prudence, which sometimes implies relegating post-crisis moral hazard concerns to a secondary role.

Number of Pages in PDF File: 27

Keywords: subprime crisis, liquidity, bailout, intermediation, credit spreads

JEL Classification: E44, G14, G21

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Date posted: November 9, 2008  

Suggested Citation

Caballero, Ricardo J. and Kurlat, Pablo D., Flight to Quality and Bailouts: Policy Remarks and a Literature Review (October 9, 2008). MIT Department of Economics Working Paper No. 08-21. Available at SSRN: http://ssrn.com/abstract=1297456 or http://dx.doi.org/10.2139/ssrn.1297456

Contact Information

Ricardo J. Caballero (Contact Author)
Massachusetts Institute of Technology (MIT) - Department of Economics ( email )
50 Memorial Drive
E52-252A
Cambridge, MA 02142
United States
617-253-0489 (Phone)
617-253-1330 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Pablo D. Kurlat
Stanford University - Department of Economics ( email )
Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
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