Smooth versus Harsh Regulatory Interventions and Policy Equivalence

Linda Schilling - Aug 03, 2023

Working Paper No.  00123-00

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.

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