Browsing by Subject "Bailouts"
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Item Essays on financial crisis.(2011-07) Wang, ChunyangThis dissertation consists of two essays. The first essay studies theoretically the relationship between government bailouts and bank runs. There were widespread bank runs and government bailouts during the 2008 Financial Crisis. Immediately following the announcement of various bailout policies intended to prevent banking panics, bank run probabilities for some banks, as measured by various bank run indices, rose dramatically. An extreme example is the run on Northern Rock right after its bailout announcement. This paper develops a model of information based bank runs to analyze how the announcement of bailouts affects investors' bank run incentives. I consider an environment where the quality of a bank's asset is random, and both the government and investors obtain private signals of the asset quality after its realization. The government bails out the bank in the form of capital injection only if it perceives the bank is bad. The equilibrium probability of bank runs is uniquely determined. I conclude that before the announcement, the existence of such bailout policy reduces investors' bank run incentives, but after the announcement, investors may run on the bank, since such an announcement reflects the government's information about the bad bank asset. The announcement of bailouts will be more likely to trigger bank runs if the bailout amount is smaller, the government is better informed, or the government specifies the bank is worse. The second essay examines the effect of bank bailouts on the probability of bank runs empirically. I conduct event studies in which I use the stock price abnormal return as a proxy for the probability of a bank run. Consistent with my theory, I find that, the recipient unspecified announcement of TARP generated positive abnormal returns, but after the specified bailout announcements, banks displayed significant negative abnormal returns and the abnormal return was positively correlated with the bailout ratio.Item Essays on International Private Debt(2021-05) Arce Munoz, FernandoThis dissertation consists of three chapters. A unifying theme across all chapters is the interaction between international private debt and government's policies. The first chapter argues that excessive international private debt increases the frequency and severity of sovereign debt crises. I develop a quantitative theory of private and public debt that allows me to measure the level of private overborrowing and its effect on the interest rate spread on public debt. In an environment where private credit is constrained by the market value of income, individually optimal private borrowing decisions are inefficient at the aggregate level. High private debt increases the probability of a financial crisis, characterized by a large deleveraging in private debt and a contraction in consumption. During such crises, the drop in consumption is amplified trough the endogenous decline in the market value of collateral. To counter this reduction, the government responds with fiscal bailouts financed with risky external public debt. This response may cause a sovereign debt crisis, which is characterized by high interest rates spreads, and in some cases, default. I find that the theory is quantitatively consistent with the evolution of international private debt, international public debt, and sovereign spreads in Spain from 1999 to 2015. I estimate that excessive private debt raised the interest rate spread on public bonds by at least 3.8 percentage points at its peak in 2012. The second chapter, in turn, proposes a theory of foreign reserves as macroprudential policy. This Chapter was written in collaboration with Julien Bengui and Javier Bianchi. We study an open economy model of financial crises, in which pecuniary externalities lead to overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory can explain the empirical patterns of public and private international capital flows, both in the cross-section and over time. The third chapter examines the interaction between international debt and inequality. This chapter was written in collaboration with Monica Tran-Xuan. We introduce household heterogeneity in a standard model of sudden stop crises. We find that although there is overborrowing at the aggregate level this result is not true for all types of households. While high income households overborrow, low income households underborrow. In future versions of this paper we would like to study the implications of this result for the redistributional consequences of macroprudential policies.Item Essays on Macroeconomics(2020-07) Dinh, SonThis thesis studies the effect of domestic bank run risks on government borrow- ing and reserve policies in models that feature systemic bank runs and sovereign default. In chapter 1, I develop a qualitative analysis of financial instability and government interventions to study the effectiveness of government’s bailout policies in stabilizing the banking system and improving economic outcomes during periods of limited fiscal capacity. The central result from this analysis is that an ex-post lender-of-last-resort policy is effective only if the government is fiscally credible, and that a reserve position augments the fiscal resources and allows the government to eliminate banking panics and implement the no-run competitive equilibrium outcome. In chapter 2, I propose a quantitative model of systemic bank runs and sovereign default to study welfare implications of reserve accumulation and bank transfer policies when the fiscal sustainability risk and bank run risk are taken into consideration. Policymakers in developing countries often argue that an important reason for having international reserves is to have adequate liquidity in the event of shocks like bank runs. When countries’ fundamentals are weak, pessimistic expectations of investors can lead to runs on the domestic banking system. A government which commits to aggressively intervene ex-post can help to eliminate the ”pessimistic” run equilibrium. Such intervention, by simply borrowing in the face of an impending crisis, is costly because interest rates rise sharply in crisis times. One way to prepare for crises is to build up a stock of international reserves in normal times. The model connects the roles of reserves with private economic activity via the government’s financing need for discretionary expenditures that stems from promised bailouts of the banking system in crisis times. In the quantitative exercise, I find that a procyclical reserves accumulation-decumulation policy equal 2.5% of output, when coupled with a modest bank transfer policy, delivers a welfare gain of 0.018% in consumption equivalence term.