Summary
Based on the model of Cordella and Yeyati (2003) this paper compares the effect of several bailout strategies of a „lender of last resort“ (LoLR) on a bank’s risk behaviour. We show that both „constructed ambiguity“, defined as a properly mixed strategy, and a pure strategy where a LoLR rescues always or never are not the optimal strategies. The LoLR should rather apply a contingent rule which means that he should announce and commit ex ante to a bailout policy depending on a verifiable state of nature. For this reason the optimal bailout policy should not be case by case, but follow an ex ante defined rule. Consequently, there is no contradiction between incentive efficiency and transparency of an efficient LoLR-policy.
© 2011 by Lucius & Lucius, Stuttgart
