Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts

Emmanuel Farhi, Jean Tirole

NBER Working Paper No. 15138
Issued in July 2009
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

The paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities have little choice but facilitating refinancing. In turn, refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, there is a role for macro-prudential supervision. We characterize the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets. We establish the robustness of our insights when the set of bailout instruments is endogenous and characterize the structure of optimal bailouts.

download in pdf format
   (450 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15138

Published: Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February. citation courtesy of

Users who downloaded this paper also downloaded* these:
Acharya and Viswanathan w15837 Leverage, Moral Hazard and Liquidity
Rajan w11728 Has Financial Development Made the World Riskier?
Diamond and Rajan w15197 Illiquidity and Interest Rate Policy
Holmstrom and Tirole w5817 Private and Public Supply of Liquidity
Taylor w14631 The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us