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/lp/american-economic-association/bank-bailouts-international-linkages-and-cooperation-xZyxf5rHPM
- Publisher
- American Economic Association
- Copyright
- Copyright © 2013 by the American Economic Association
- Subject
- Articles
- ISSN
- 1945-7731
- eISSN
- 1945-774x
- DOI
- 10.1257/pol.5.4.270
- Publisher site
- See Article on Publisher Site
Abstract
Abstract Financial institutions are increasingly linked internationally. As a result, financial crises and government intervention have stronger effects beyond borders. We provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation losses, and intra- and intercountry income inequality, in the noncooperative game between governments there are inefficiencies due to externalities, a lack of burden sharing, and free riding. We show that, in absence of cooperation, stronger interbank linkages make government interests diverge, whereas cross-border asset holdings tend to align them. We analyze different forms of cooperation and their effects on global and national welfare. (JEL C72 , G01 , G21 , G28 )
Journal
American Economic Journal: Economic Policy – American Economic Association
Published: Nov 1, 2013