Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts

@inproceedings{Farhi2012CollectiveMH,
  title={Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts},
  author={Emmanuel Farhi and Jean Tirole},
  year={2012}
}
The paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities haver little choice but facilitating refinancing. In turn, refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage, while… CONTINUE READING

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