Asset Purchase Bailouts and Endogenous Implicit Guarantees

40 Pages Posted: 22 Jan 2018 Last revised: 29 Nov 2019

See all articles by Eric Mengus

Eric Mengus

HEC Paris - Economics & Decision Sciences

Date Written: September 18, 2019

Abstract

This paper provides a theory of endogenous implicit guarantees and how this leads to the existence of systemic assets, i.e. assets that are too important to default. In the presence of imperfectly observable private liquidity needs, direct transfers to agents are imperfect so that, when more constrained agents are also more exposed to a given asset, asset purchases are optimal. When anticipated, this form of bailouts leads to an endogenous implicit guarantee premium. This possibility of implicit guarantee is amplified by other financial frictions such as risk-shifting. Finally, we show how this form of bailouts can shed light on the buildup of the euro area sovereign debt crisis.

Keywords: Implicit guarantees, bailouts, intrinsically worthless assets

JEL Classification: E44, F34, G28

Suggested Citation

Mengus, Eric, Asset Purchase Bailouts and Endogenous Implicit Guarantees (September 18, 2019). HEC Paris Research Paper No. ECO/SCD-2018-1248. Available at SSRN: https://ssrn.com/abstract=3105470 or http://dx.doi.org/10.2139/ssrn.3105470

Eric Mengus (Contact Author)

HEC Paris - Economics & Decision Sciences ( email )

Paris
France

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