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A theory of the non-neutrality of money with banking frictions and bank recapitalization

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  • Zeng, Zhixiong

Abstract

Policy actions by the Federal Reserve during the recent financial crisis often involve recapitalization of banks. This paper offers a theory of the non-neutrality of money for policy actions taking the form of injecting capital into banks via nominal transfers, in an environment where banking frictions are present in the sense that there exists an agency cost problem between banks and their private-sector creditors. The analysis is conducted within a general equilibrium setting with two-sided financial contracting. We first show that even with perfect nominal flexibility, the recapitalization policy can have real effects on the economy. We then study the design of the optimal long-run recapitalization policy as well as the optimal short-run policy responses to banking riskiness shocks.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24752.

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Date of creation: 25 Aug 2010
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Handle: RePEc:pra:mprapa:24752

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Keywords: Banking frictions; two-sided debt contract; money neutrality; unconventional monetary policy; reaction function.;

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Citations

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Cited by:
  1. Zhixiong Zeng, 2013. "A theory of the non-neutrality of money with banking frictions and bank recapitalization," Economic Theory, Springer, vol. 52(2), pages 729-754, March.
  2. Hirakata, Naohisa & Sudo, Nao & Ueda, Kozo, 2013. "Is the net worth of financial intermediaries more important than that of non-financial firms?," Globalization and Monetary Policy Institute Working Paper 161, Federal Reserve Bank of Dallas.
  3. Christian Ewerhart, 2013. "Regular type distributions in mechanism design and $$\rho $$ -concavity," Economic Theory, Springer, vol. 53(3), pages 591-603, August.
  4. Zeng, Zhixiong, 2010. "A theory of the non-neutrality of money with banking frictions and bank recapitalization," MPRA Paper 24752, University Library of Munich, Germany.
  5. Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
  6. Yi Jin & Zhixiong Zeng, 2011. "The Financial and Macroeconomic Implications of Banking Frictions and Banking Riskiness," Development Research Unit Working Paper Series 14-11, Monash University, Department of Economics.

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