Financial Safety Nets

28 Pages Posted: 20 Feb 2019

See all articles by Julien Bengui

Julien Bengui

Université de Montréal

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Louphou Coulibaly

University of Pittsburgh - Department of Economics

Date Written: February 2019

Abstract

We study the optimal design of financial safety nets under limited private credit, asking whether and when it is optimal to restrict ex ante the set of investors that can receive public liquidity support. When the government lacks commitment, we show that the optimally designed 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 welfare. Our results can rationalize the prevalence of limited safety nets as well as the coexistence of traditional and shadow banks.

Suggested Citation

Bengui, Julien and Bianchi, Javier and Coulibaly, Louphou, Financial Safety Nets (February 2019). International Economic Review, Vol. 60, Issue 1, pp. 105-132, 2019, Available at SSRN: https://ssrn.com/abstract=3335299 or http://dx.doi.org/10.1111/iere.12346

Julien Bengui (Contact Author)

Université de Montréal ( email )

C.P. 6128 succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

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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