Flight to quality and bailouts : policy remarks and a literature review

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The Resource Flight to quality and bailouts : policy remarks and a literature review

Label: Flight to quality and bailouts : policy remarks and a literature review

Statement of responsibility: [by] Ricardo J. Caballero [and] Pablo D. Kurlat

Summary: Flight to quality episodes involve a combination of extreme risk- or uncertainty-aversion, weaknesses in the balance sheets of key financial intermediaries, and strategic or speculative behavior, that increases credit spreads on all but the safest and most liquid assets. Unlike previous episodes, the entire U.S. financial system is currently at the center of the trouble, with no safe haven pockets, which may lead to greater real effects. The U.S. government's credit is still impeccable, which facilitates policies in support of the financial system. Policy must take into account incentives for behavior during the crisis, discouraging excessive prudence, which sometimes implies relegating post-crisis moral hazard concerns to a secondary role. Keywords: subprime crisis, liquidity, bailout, intermediation, credit spreads. JEL Classifications: E44, G14, G21

Additional physical form: Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.

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Series statement: Working paper series / Massachusetts Institute of Technology, Dept. of Economics

Context

Context of Flight to quality and bailouts : policy remarks and a literature review