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Moral hazard misconceptions : the case of the Greenspan put

Author: Gideon Bornstein; Guido Lorenzoni; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2017.
Series: Working paper series (National Bureau of Economic Research), no. 24050.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
Policy discussions on financial market regulation tend to assume that whenever a corrective policy is used ex post to ameliorate the effects of a crisis, there are negative side effects in terms of moral hazard ex ante. This paper shows that this is not a general theoretical prediction, focusing on the case of monetary policy interventions ex post. In particular, we show that if the central bank does not intervene  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Gideon Bornstein; Guido Lorenzoni; National Bureau of Economic Research,
OCLC Number: 1013566293
Notes: "November 2017"
Description: 1 online resource (42 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 24050.
Responsibility: Gideon Bornstein, Guido Lorenzoni.

Abstract:

Policy discussions on financial market regulation tend to assume that whenever a corrective policy is used ex post to ameliorate the effects of a crisis, there are negative side effects in terms of moral hazard ex ante. This paper shows that this is not a general theoretical prediction, focusing on the case of monetary policy interventions ex post. In particular, we show that if the central bank does not intervene by monetary easing following a crisis, this creates an aggregate demand externality that makes borrowing ex ante inefficient. If instead the central bank follows the optimal discretionary policy and intervenes to stabilize asset prices and real activity, we show examples in which the aggregate demand externality disappears, reducing the need for ex ante intervention.

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