Abstract:
We construct a dynamic general equilibrium model with limited liability banks to compare short- and long-run financial stability and macroeconomic outcomes under a regime in which insolvent banks are bailed out by the government with a regime in which bank creditors are bailed in. We find that long-run investment, capital, output, and consumption are higher under the bailout regime. Bailouts also mitigate the impact of financial crises with respect to the bail-in regime, as lower funding costs increase banks’ profitability. Bailouts, however, substantially increase the fraction of banks that need to be recapitalized with respect to the bail-in regime.
Presenter: Christiaan van der Kwaak (University of Groningen)
Title: “To Bail-in or to Bailout: that's the (Macro) Question”