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Monetary Policy and Covered Interest Parity in the Post GFC Period: Evidence from the Australian Dollar and the NZ Dollar

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  • Hiroyuki Kasahara

    (Department of Economics, University of British Columbia)

  • Yasuyuki Sawada

    (Faculty of Economics, The University of Tokyo)

  • Michio Suzuki

    (Faculty of Economics, The University of Tokyo)

Abstract

This article examines the effect of government capital injections into financially troubled banks on corporate investment during the Japanese banking crisis of the late 1990s. By helping banks meet the capital requirements imposed by Japanese banking regulation, recapitalization enables banks to respond to loan demands, which could help firms increase their investment. To test this mechanism empirically, we combine the balance sheet data of Japanese manufacturing firms with bank balance sheet data and estimate a linear investment model where the investment rate is a function of not only firm productivity and size but also bank regulatory capital ratios. We find that the coeffcient of the interaction between a firm's total factor productivity measure and a bank's capital ratio is positive and significant, implying that the bank's capital ratio affects more productive firms. Counterfactual policy experiments suggest that capital injections made in March 1998 and 1999 had a negligible impact on the average investment rate, although there was a reallocation effect, shifting investments from low- to high-productivity firms.

Suggested Citation

  • Hiroyuki Kasahara & Yasuyuki Sawada & Michio Suzuki, 2016. "Monetary Policy and Covered Interest Parity in the Post GFC Period: Evidence from the Australian Dollar and the NZ Dollar," CIRJE F-Series CIRJE-F-1033, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2016cf1033
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    References listed on IDEAS

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