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.