A Reinterpretation of the Gordon and Barro Model in Terms of Financial Stability

9 Pages Posted: 16 Aug 2014

Date Written: August 12, 2014

Abstract

A government bailout model based on the framework of time-consistent monetary policy of Barro and Gordon (1983) 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.

Keywords: Government intervention, bailout, real investment

JEL Classification: G1, G2, G3

Suggested Citation

Lopomo Beteto Wegner, Danilo, A Reinterpretation of the Gordon and Barro Model in Terms of Financial Stability (August 12, 2014). Available at SSRN: https://ssrn.com/abstract=2480771 or http://dx.doi.org/10.2139/ssrn.2480771

Danilo Lopomo Beteto Wegner (Contact Author)

Australian Institute of Business ( email )

27 Currie Street
Adelaide, 5000
Australia

HOME PAGE: http://https://works.bepress.com/dlbwegner/

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