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American Economic Journal: Economic Policy: Vol. 5 No. 4 (November 2013)

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Bank Bailouts, International Linkages, and Cooperation

Article Citation

Niepmann, Friederike, and Tim Schmidt-Eisenlohr. 2013. "Bank Bailouts, International Linkages, and Cooperation." American Economic Journal: Economic Policy, 5(4): 270-305.

DOI: 10.1257/pol.5.4.270

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.

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Authors

Niepmann, Friederike (Federal Reserve Bank of New York)
Schmidt-Eisenlohr, Tim (U Oxford)

JEL Classifications

C72: Noncooperative Games
G01: Financial Crises
G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G28: Financial Institutions and Services: Government Policy and Regulation

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