Are Bank Bailouts Welfare Improving?

Malik Shukayev & Alexander Ueberfeldt
"The financial sector bailouts seen during the Great Recession generated substantial opposition and controversy. We assess the welfare benefits of government-funded emergency support to the financial sector, taking into account its effects on risk-taking incentives. In our quantitative general equilibrium model, the probability of a financial crisis depends on the balance sheet choices of financial intermediaries. Those choices are influenced by capital adequacy constraints and ex ante known emergency support provisions. These policy tools interact...
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