Discussion paper

DP17996 Smooth versus Harsh Regulatory Interventions and Policy Equivalence

Policy makers have developed different forms of policy intervention for stopping, or preventing runs on financial firms. This paper provides a general framework to characterize the types of policy intervention that indeed lower the run-propensity of investors versus those that cause adverse investor behavior, which increases the run-propensity. I employ a general global game to analyze and compare a large set of regulatory policies. I show that common policies such as bailouts, Emergency Liquidity Assistance, and withdrawal fees either exhibit features that lower firm stability ex ante, or have offsetting features rendering the policy ineffective.


Schilling, L (2023), ‘DP17996 Smooth versus Harsh Regulatory Interventions and Policy Equivalence‘, CEPR Discussion Paper No. 17996. CEPR Press, Paris & London. https://cepr.org/publications/dp17996