Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/241189 
Year of Publication: 
2020
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2020-23
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Government interventions such as bailouts are often implemented in times of high uncertainty. Policymakers may therefore rely on information from financial markets to guide their decisions. We propose a model in which a policymaker learns from market activity and where market participants have high stakes in the intervention. We study how the strategic behavior of informed traders affects market informativeness, the probability and efficiency of bailouts, and stock prices. We apply the model to study the liquidity support of distressed banks and derive implications for market informativeness and policy design. Commitment to a minimum liquidity support can increase market informativeness and welfare.
Subjects: 
Financial institutions
Financial markets
Financial system regulation and policies
Lenderof last resort
JEL: 
D83
G12
G14
G18
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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