Soft budget constraints, bank capital, and the monetary transmission mechanism
AbstractThis paper investigates the effect of monetary policy in a situation where soft budget constraint problems prevail in the economy and the bank faces a capital requirement. Under these circumstances, an expansionary monetary policy may increase quantity of bank lending without improving the quality and thus may not stimulate economic activity. On the other hand, in order to solve the problem of soft budget constraint problems and to improve the quality of bank lending, the quantity of bank lending should be decreased. Central authorities need to keep this tradeoff in mind when exercising monetary policy and injecting public funds.
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Bibliographic InfoArticle provided by Elsevier in its journal Japan and the World Economy.
Volume (Year): 20 (2008)
Issue (Month): 2 (March)
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Web page: http://www.elsevier.com/locate/inca/505557
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