In this paper we consider emergency government bailouts. We show that it is welfare‐enhancing to bail out failing firms that are facing a sudden negative demand shock and would otherwise go bankrupt, when there are sufficiently large fixed production costs and knock‐on effects (the negative...

The profound influence of the 2008 financial crisis has renewed interests in the financial instability hypothesis of Minsky, which attributes financial crisis to credit-intensive booms. This paper investigates the relationship between credit growth and the probability of a banking crisis based...