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Capital Injection, Monetary Policy, and Financial Accelerators

Author

Listed:
  • Naohisa Hirakata

    (Deputy Director and Economist, Research and Statistics Department, Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp))

  • Nao Sudo

    (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudou@boj.or.jp))

  • Kozo Ueda

    (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda boj.or.jp))

Abstract

We 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.

Suggested Citation

  • Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2011. "Capital Injection, Monetary Policy, and Financial Accelerators," IMES Discussion Paper Series 11-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:11-e-10
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial Accelerators; Spread-adjusted Taylor rule; Capital Injection;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F52 - International Economics - - International Relations, National Security, and International Political Economy - - - National Security; Economic Nationalism

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