Financial Safety Nets

38 Pages Posted: 7 Sep 2016

See all articles by Julien Bengui

Julien Bengui

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Louphou Coulibaly

University of Pittsburgh - Department of Economics

Date Written: September 2016

Abstract

In this paper, we study the optimal design of financial safety nets under limited private credit. We ask when it is optimal to restrict ex ante the set of investors that can receive public liquidity support ex post. When the government can commit, the optimal safety net covers all investors. Introducing a wedge between identical investors is inefficient. Without commitment, an optimally designed financial safety net covers only a subset of investors. Compared to an economy where all investors are protected, this results in more liquid portfolios, better social insurance, and higher ex ante welfare. Our result can rationalize the prevalent limited coverage of safety nets, such as the lender of last resort facilities.

Suggested Citation

Bengui, Julien and Bianchi, Javier and Coulibaly, Louphou, Financial Safety Nets (September 2016). NBER Working Paper No. w22594, Available at SSRN: https://ssrn.com/abstract=2835852

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Louphou Coulibaly

University of Pittsburgh - Department of Economics ( email )

4901 Wesley Posvar Hall
230 South Bouquet Street
Pittsburgh, PA 15260
United States

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