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Soft budget constraints, bank capital, and the monetary transmission mechanism

  • Toyofuku, Kenta
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    This 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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    File URL: http://www.sciencedirect.com/science/article/B6VF1-4MJBTPW-1/1/6e3c23d3b64dc9b4fdb7f160246d498d
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    Article provided by Elsevier in its journal Japan and the World Economy.

    Volume (Year): 20 (2008)
    Issue (Month): 2 (March)
    Pages: 194-216

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    Handle: RePEc:eee:japwor:v:20:y:2008:i:2:p:194-216
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505557

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    1. Patrick Bolton & Xavier Freixas, 2006. "Corporate Finance and the Monetary Transmission Mechanism," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 829-870.
    2. Repullo,R. & Suarez,J., 1996. "Entrepreneurial Moral Hazard and Bank Monitoring: A Model of the Credit Channel," Papers 9604, Centro de Estudios Monetarios Y Financieros-.
    3. Bengt Holmstrom & Jean Tirole, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," Working papers 95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Blum, Jurg, 1999. "Do capital adequacy requirements reduce risks in banking?," Journal of Banking & Finance, Elsevier, vol. 23(5), pages 755-771, May.
    5. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
    6. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
    7. Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers 512, Society for Economic Dynamics.
    8. Anil Kashyap & Jeremy C. Stein, 1993. "Monetary Policy and Bank Lending," NBER Working Papers 4317, National Bureau of Economic Research, Inc.
    9. Chen, Nan-Kuang & Chu, Hsiao-Lei & Liu, Jin-Tan & Wang, Kuang-Hsien, 2006. "Collateral value, firm borrowing, and forbearance lending: an empirical study of Taiwan," Japan and the World Economy, Elsevier, vol. 18(1), pages 49-71, January.
    10. Berglof, Erik & Roland, Gerard, 1997. "Soft budget constraints and credit crunches in financial transition," European Economic Review, Elsevier, vol. 41(3-5), pages 807-817, April.
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