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On the Distributional Effects of Bank Bailouts

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  • Josef Schroth

    (Bank of Canada)

Abstract

This paper studies distributional consequences of equity injections that are funded with financial-sector levies. In the model economy, financial intermediation supports both productive investment and individual consumption smoothing, subject to an equity requirement. When intermediary equity is low, then an equity injection involves a trade-off between increasing credit supply immediately and distortive levies that reduce credit supply in the future. I find that equity injections redistribute from poor to wealthy households, even though average welfare increases. While wealthy savers benefit greatly from an increased return on savings, poor households suffer from lower future wages. (Copyright: Elsevier)

Suggested Citation

  • Josef Schroth, 2021. "On the Distributional Effects of Bank Bailouts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 252-277, April.
  • Handle: RePEc:red:issued:19-34
    DOI: 10.1016/j.red.2020.09.010
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    2. Yu-Ting Chiang & Piotr Żoch, 2022. "Financial Intermediation and Aggregate Demand: A Sufficient Statistics Approach," Working Papers 2022-038, Federal Reserve Bank of St. Louis, revised 26 Jul 2023.

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    More about this item

    Keywords

    Financial crisis; Equity injection; Incomplete markets; Distributional effects;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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