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Technology shocks, banking sector policy, and the trade-off between firms and households

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  • Ghosh, Saurabh
  • Gopalakrishnan, Pawan
  • Ranjan, Abhishek

Abstract

In this paper, we analyse the best possible policy responses for banks facing the possibility of loan default because of an extreme and rare negative productivity shock. We use a finite-period framework with complete information to analyse the impact of such a shock on an economy in the presence of financial frictions, such as sticky deposit rates. Our findings indicate that any recapitalization measure works best in a flexible deposit/lending rate environment for all alternative-saving vehicles, as it leads to better transmission. However, policy interventions to revive economic activity may result in a trade-off between firms’ profit and consumers’ welfare. We, therefore, underline the importance of household welfare, which is augmented by government social expenditure and households’ interest income. Since these may decline due to supply side measures, we note the importance of demand management policies that may help overcome any such welfare effects.

Suggested Citation

  • Ghosh, Saurabh & Gopalakrishnan, Pawan & Ranjan, Abhishek, 2022. "Technology shocks, banking sector policy, and the trade-off between firms and households," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 664-688.
    • Handle: RePEc:eee:ecanpo:v:75:y:2022:i:c:p:664-688
    DOI: 10.1016/j.eap.2022.06.013
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    More about this item

    Keywords

    Capital infusion; Bank bailouts; Administered interest rates; Statutory liquidity ratio; Monetary policy transmission;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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