Asset Purchase Bailouts and Implicit Guarantees
32 Pages Posted: 27 Jun 2017 Last revised: 2 Jul 2017
Date Written: June 26, 2017
This paper shows that bailouts of private agents can optimally take the form of asset purchases, even if this also means paying off external asset holders, in the presence of borrowing constraints and asymmetric information on liquidity needs. The combination of these two ingredients make direct compensation through loans and/or net transfers imperfect. Thus, when more constrained agents are also more exposed to the asset, the compensation through asset purchases becomes desirable. Anticipating these purchases, private agents engage in a collective bet on the defaulting asset, leading to an equilibrium implicit guarantee, where even an intrinsically worthless asset can be traded at a positive price.
Keywords: Implicit guarantees, bailouts, capital ows, capital controls
JEL Classification: F34, F36, F65
Suggested Citation: Suggested Citation