Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/46237 
Year of Publication: 
2011
Series/Report no.: 
CESifo Working Paper No. 3384
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Financial institutions are increasingly linked internationally. As a result, financial crisis and government intervention have stronger effects beyond borders. We provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation losses and intra- and inter-country income inequality, in the non-cooperative game between governments there are inefficiencies due to externalities, no burden sharing and free-riding. We show that, in absence of cooperation, stronger interbank linkages make government interests diverge, whereas cross-border asset holdings tend to align them. We analyze different forms of cooperation and their effects on global and national welfare.
Subjects: 
bailout
contagion
financial crisis
international institutional arrangements
JEL: 
F36
F42
G01
G28
Document Type: 
Working Paper
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