Capital Injection, Monetary Policy, and Financial Accelerators
AbstractWe evaluate the implications of spread-adjusted Taylor rules and capital injection policies in response to adverse shocks to the economy, using a variant of the financial accelerator model. Our model comprises the two credit-constrained sectors that raise external finance under the credit market imperfection: financial intermediaries (FIs) and entrepreneurs. Using a model calibrated to the United States, we find that a spread-adjusted Taylor rule mitigates (amplifies) the impact of adverse shocks when the shock is accompanied by a widening (shrinking) of the corresponding spread. We formalize a capital injection policy as a positive (negative) amount of injection to either of the two sectors in response to an adverse shock (a favorable shock). In contrast to a spread-adjusted Taylor rule, a positive injection boosts the economy regardless of the type of shock. The capital injection to the FIs has a greater impact on the economy compared with that to the entrepreneurs. Although the welfare implication of these policies varies depending on the source of economic downturn, our result shows more support for adopting the spread-adjusted Taylor rules than capital injections.
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Bibliographic InfoPaper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 11-E-10.
Date of creation: Mar 2011
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Financial Accelerators; Spread-adjusted Taylor rule; Capital Injection;
Other versions of this item:
- Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2013. "Capital Injection, Monetary Policy, and Financial Accelerators," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 101-145, June.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F52 - International Economics - - International Relations and International Political Economy - - - National Security; Economic Nationalism
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-02 (All new papers)
- NEP-CBA-2011-04-02 (Central Banking)
- NEP-MAC-2011-04-02 (Macroeconomics)
- NEP-MON-2011-04-02 (Monetary Economics)
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