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Full-Text Articles in Social and Behavioral Sciences
Government Induced Bubbles, Danilo Lopomo Beteto Wegner
Government Induced Bubbles, Danilo Lopomo Beteto Wegner
Danilo Lopomo Beteto Wegner
A model to study how the possibility of government intervention during market crashes impacts the investment decision of agents is developed. With crashes representing bubble burst episodes and a government policy rule based on their magnitude, it is shown that the possibility of intervention creates incentives for investors to inflate bubbles, as large bubbles (i) maximize capital gains if they do not burst and (ii) make intervention more likely, thus minimizing losses. Bubbles should be larger the less fragile the economy, the less costly the intervention and the more liquid the asset. Intervention increases welfare in extremely fragile economies.
Government Insurance, Information, And Asset Prices, Danilo Lopomo Beteto Wegner
Government Insurance, Information, And Asset Prices, Danilo Lopomo Beteto Wegner
Danilo Lopomo Beteto Wegner
An investment decision problem is studied, in a framework where the government offers insurance against the possibility of the price of a risky asset falling drastically. The problem is considered under different informational scenarios, i.e., information quality, under which agents have to infer the state of fundamentals of the economy. Changes in information quality is shown to affect equilibrium prices despite no concomitant changes in the fundamentals, creating excess volatility. The possibility of government intervention is shown to increase equilibrium prices, which can be ordered as a function of information quality. Empirical evidence supporting the model is presented.
Network Formation And Financial Fragility, Danilo Lopomo Beteto Wegner
Network Formation And Financial Fragility, Danilo Lopomo Beteto Wegner
Danilo Lopomo Beteto Wegner
A tractable model of the formation of financial networks is developed, allowing the use of concepts from portfolio theory. The optimal financial network maximizes a Sharpe ratio defined for financial networks, whereas the equilibrium financial network emerges from banks bargaining over future proceeds of co-investment opportunities. Measures of financial fragility, systemic risk and robustness are developed. The equilibrium financial network is shown to be the most connected and with the lowest level of financial fragility, whereas the optimal is the one least connected and with lowest exposure to systemic risk, being also the most robust financial network.
A Reinterpretation Of The Gordon And Barro Model In Terms Of Financial Stability, Danilo Lopomo Beteto Wegner
A Reinterpretation Of The Gordon And Barro Model In Terms Of Financial Stability, Danilo Lopomo Beteto Wegner
Danilo Lopomo Beteto Wegner
A government bailout model based on the framework of time-consistent monetary policy of Barro and Gordon (83) is developed. In the model, the banking sector and the government play a game where the former chooses a bailout expectation whereas the later reacts by choosing its optimal bailout policy. The banking sector is assumed to be perfectly competitive, aiming only at anticipating the bailout policy. An excess of credit ensues and firms over-invest, which can be amended by an appropriately chosen reserve requirement. The government faces a trade-off between efficiency and stability in trying to minimize the costs of intervention.