The political economy of government interventions in financial crises
Author(s)
Foarță, Octavia Daniela
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Massachusetts Institute of Technology. Department of Economics.
Advisor
Daron Acemoglu and Iván Werning.
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Chapter 1 examines how political economy considerations affect the desirability of banking unions. It presents a model in which bank recapitalizations are carried out by rent-seeking policymakers. These policymakers face a trade-off between using public funds for needed recapitalizations and diverting them towards socially inefficient rents. In equilibrium, a banking union increases recapitalizations, but it can also increase rent-seeking and decrease consumer welfare. I consider two policy proposals for countering the reduction in welfare: better electoral accountability and limits on public debt. When used alone, neither policy can increase welfare for all countries in the banking union. When used together, the policies have complementary effects, and a Pareto improvement can be achieved in consumer welfare. Chapter 2 focuses on two key features of the bailout programs seen in the 2008-2009 financial crisis: first, the opposition of voters to these programs; and second, the implementation of a variety of interventions, ranging from targeted transfers that inject capital in particular institutions to untargeted transfers aimed at entire sectors. I argue that a shift towards untargeted transfers emerges in a political economy environment, when voters possess less information than the government about the shocks hitting the economy, and when firms can lobby the government for socially inefficient transfers. The model shows that the optimal incentives voters give to elected politicians lead to persistent effects of government interventions. Chapter 3 examines the optimal degree of centralization that can be achieved with respect to bailout policies when a central authority cannot supervise the entire banking system of the economy. Part of the banking system is supervised by a local authority that can observe local shocks and is biased towards local banks. The chapter presents a model of delegation in which a central authority can mandate the contribution of the local authority to bank bailouts as well as the size of the bailout fund. I derive conditions under which it is optimal for the local authority to be given full autonomy over bailout policies. The model shows that these conditions become more restrictive if the local authority can use public debt to increase the size of the bailout fund.
Description
Thesis: Ph. D., Massachusetts Institute of Technology, Department of Economics, 2014. Cataloged from PDF version of thesis. Includes bibliographical references (pages 190-200).
Date issued
2014Department
Massachusetts Institute of Technology. Department of EconomicsPublisher
Massachusetts Institute of Technology
Keywords
Economics.