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Smooth versus Harsh Regulatory Interventions and Policy Equivalence

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  • Schilling, Linda

Abstract

Policy makers have developed different forms of policy intervention for stopping, or preventing runs on financial firms. This paper provides a general framework to characterize the types of policy intervention that indeed lower the run-propensity of investors versus those that cause adverse investor behavior, which increases the run-propensity. I employ a general global game to analyze and compare a large set of regulatory policies. I show that common policies such as bailouts, Emergency Liquidity Assistance, and withdrawal fees either exhibit features that lower firm stability ex ante, or have offsetting features rendering the policy ineffective.

Suggested Citation

  • Schilling, Linda, 2023. "Smooth versus Harsh Regulatory Interventions and Policy Equivalence," MPRA Paper 116612, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:116612
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    financial regulation; bank runs; global games; policy effectiveness; bank resolution; withdrawal fees; emergency liquidity assistance; lender of last resort policies; money market mutual fund gates; suspension of convertibility;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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