Asset Purchase Bailouts and Endogenous Implicit Guarantees
40 Pages Posted: 22 Jan 2018 Last revised: 29 Nov 2019
Date Written: September 18, 2019
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: Suggested Citation