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Victor Vaugirard
''Bank runs, political distortions and contagion''
( 2004, Vol. 6 No.18 )
This paper highlights the spread of banking panics across countries, as the public reassesses governments' propensity to bailouts. Policymakers decide whether to rescue a failing banking sector, by weighing the costs of a collapse against the costs associated with raising taxes to finance a bailout package. The former involve social costs for the society and personal costs for policymakers. In addition, they have an informational advantage over creditors regarding the costs of bank liquidation. A crisis in a country leads lenders to reexamine policymakers'' willingness to intervene in other countries, which eventually makes their banks more vulnerable to self-fulfilling depositors'' runs.
JEL: F3 - International Finance: General
G2 - Financial Institutions and Services: General
Manuscript Received : Jul 13 2004 Manuscript Accepted : Oct 15 2004

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