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Creator: Bengui, Julien, Bianchi, Javier, and Coulibaly, Louphou Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 535 Abstract:
In this paper, we study the optimal design of financial safety nets under limited private credit. We ask when it is optimal to restrict ex ante the set of investors that can receive public liquidity support ex post. When the government can commit, the optimal safety net covers all investors. Introducing a wedge between identical investors is inefficient. Without commitment, an optimally designed financial 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 ex ante welfare. Our result can rationalize the prevalent limited coverage of safety nets, such as the lender of last resort facilities.
Palavra-chave: Public liquidity provision, Bailouts, Time inconsistency, and Safety nets Sujeito: G28 - Financial Institutions and Services: Government Policy and Regulation, E58 - Central Banks and Their Policies, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination