[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/bca/bocawp/16-29.html
   My bibliography  Save this paper

Financial Crisis Interventions

Author

Listed:
  • Josef Schroth
Abstract
This paper develops a model of an economy where bank credit supports both productive investment and individual consumption smoothing in the face of idiosyncratic income risk. Bank credit is constrained by bank equity capital. When policy-makers inject equity capital during financial crises, they trade off stimulating credit supply immediately against long-term distortions related to funding equity injections. I calibrate my model and show that the bank equity capital injection that maximizes average utilitarian welfare redistributes from the poor to the wealthy. While wealthy savers benefit immediately from an increased supply of safe assets, less affluent borrowers and savers suffer from long-term distortions.

Suggested Citation

  • Josef Schroth, 2016. "Financial Crisis Interventions," Staff Working Papers 16-29, Bank of Canada.
    • Handle: RePEc:bca:bocawp:16-29
    as

    Download full text from publisher

    File URL: https://www.bankofcanada.ca/wp-content/uploads/2016/06/swp2016-29.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Marco Bassetto & Marco Cagetti & Mariacristina De Nardi, 2015. "Credit Crunches and Credit Allocation in a Model of Entrepreneurship," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 53-76, January.
    2. Reint Gropp & Christian Gruendl & Andre Guettler, 2014. "The Impact of Public Guarantees on Bank Risk-Taking: Evidence from a Natural Experiment," Review of Finance, European Finance Association, vol. 18(2), pages 457-488.
    3. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
    4. Matthias Doepke & Martin Schneider, 2006. "Inflation and the Redistribution of Nominal Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1069-1097, December.
    5. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    6. Marco Cagetti & Mariacristina De Nardi, 2006. "Entrepreneurship, Frictions, and Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 835-870, October.
    7. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December.
    8. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    9. Díaz-Giménez, Javier & Pijoan-Mas, Josep, 2011. "Flat Tax Reforms: Investment Expensing and Progressivity," CEPR Discussion Papers 8238, C.E.P.R. Discussion Papers.
    10. Perotti, Enrico C. & Suarez, Javier, 2002. "Last bank standing: What do I gain if you fail?," European Economic Review, Elsevier, vol. 46(9), pages 1599-1622, October.
    11. Phillip Swagel, 2015. "Legal, Political, and Institutional Constraints on the Financial Crisis Policy Response," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 107-122, Spring.
    12. Meh, Césaire A. & Ríos-Rull, José-Víctor & Terajima, Yaz, 2010. "Aggregate and welfare effects of redistribution of wealth under inflation and price-level targeting," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 637-652, September.
    13. Zhiguo He & Arvind Krishnamurthy, 2013. "Intermediary Asset Pricing," American Economic Review, American Economic Association, vol. 103(2), pages 732-770, April.
    14. Veronica Guerrieri & Guido Lorenzoni, 2017. "Credit Crises, Precautionary Savings, and the Liquidity Trap," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(3), pages 1427-1467.
    15. Vincenzo Quadrini, 2000. "Entrepreneurship, Saving and Social Mobility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 1-40, January.
    16. Marco Bassetto, 2014. "Optimal fiscal policy with heterogeneous agents," Quantitative Economics, Econometric Society, vol. 5(3), pages 675-704, November.
    17. Aubhik Khan & Julia K. Thomas, 2013. "Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1055-1107.
    18. Lammertjan Dam & Michael Koetter, 2012. "Bank Bailouts and Moral Hazard: Evidence from Germany," The Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2343-2380.
    19. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
    20. Arnaud Costinot & Guido Lorenzoni & Iván Werning, 2014. "A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation," Journal of Political Economy, University of Chicago Press, vol. 122(1), pages 77-128.
    21. Saez, Emmanuel & Zucman, Gabriel, 2014. "Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data," CEPR Discussion Papers 10227, C.E.P.R. Discussion Papers.
    22. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(4), pages 865-888.
    23. Luc Laeven & Fabian Valencia, 2020. "Systemic Banking Crises Database II," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(2), pages 307-361, June.
    24. Olivier Jeanne & Anton Korinek, 2020. "Macroprudential Regulation versus mopping up after the crash," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(3), pages 1470-1497.
    25. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    26. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 663-691.
    27. Zame, William R, 1993. "Efficiency and the Role of Default When Security Markets Are Incomplete," American Economic Review, American Economic Association, vol. 83(5), pages 1142-1164, December.
    28. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(2), pages 229-264.
    29. Zetlin-Jones, Ariel & Shourideh, Ali, 2017. "External financing and the role of financial frictions over the business cycle: Measurement and theory," Journal of Monetary Economics, Elsevier, vol. 92(C), pages 1-15.
    30. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 695-717, June.
    31. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    32. Josef Schroth, 2016. "Optimal Intermediary Rents," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(1), pages 98-118, January.
    33. Meh, Césaire A. & Moran, Kevin, 2010. "The role of bank capital in the propagation of shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 555-576, March.
    34. Buch, Claudia M. & Hilberg, Björn & Tonzer, Lena, 2016. "Taxing banks: An evaluation of the German bank levy," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 52-66.
    35. Erik Hurst & Annamaria Lusardi, 2004. "Liquidity Constraints, Household Wealth, and Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 319-347, April.
    36. Cesaire Meh, 2005. "Entrepreneurship, Wealth Inequality, and Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 688-719, July.
    37. Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2013. "Housing, mortgage bailout guarantees and the macro economy," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 917-935.
    38. Demirgüç-Kunt, Asli & Kane, Edward & Laeven, Luc, 2015. "Deposit insurance around the world: A comprehensive analysis and database," Journal of Financial Stability, Elsevier, vol. 20(C), pages 155-183.
    39. Kühl, Michael, 2014. "Mitigating financial stress in a bank-financed economy: Equity injections into banks or purchases of assets?," Discussion Papers 19/2014, Deutsche Bundesbank.
    40. Molyneux, Philip & Schaeck, Klaus & Zhou, Tim Mi, 2014. "‘Too systemically important to fail’ in banking – Evidence from bank mergers and acquisitions," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 258-282.
    41. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bagchi, Sutirtha & Curran, Michael & Fagerstrom, Matthew J., 2019. "Monetary growth and wealth inequality," Economics Letters, Elsevier, vol. 182(C), pages 23-25.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Schroth, Josef, 2021. "Macroprudential policy with capital buffers," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 296-311.
    3. Josef Schroth & Stephane Moyen, 2017. "Optimal Capital Regulation," 2017 Meeting Papers 828, Society for Economic Dynamics.
    4. Marco Bassetto & Marco Cagetti & Mariacristina De Nardi, 2015. "Credit Crunches and Credit Allocation in a Model of Entrepreneurship," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 53-76, January.
    5. Akyol, Ahmet & Athreya, Kartik, 2011. "Credit and self-employment," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 363-385, March.
    6. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2015. "Entrepreneurship and Financial Frictions: A Macrodevelopment Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 409-436, August.
    7. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.
    8. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    9. Kalemli-Özcan, Sebnem, 2018. "Leverage over the Life Cycle and Implications for Firm Growth and Shock Responsiveness," CEPR Discussion Papers 13337, C.E.P.R. Discussion Papers.
    10. Anmol Bhandari & Ellen R. McGrattan, 2017. "Sweat Equity in U.S. Private Business," Staff Report 560, Federal Reserve Bank of Minneapolis.
    11. Clemens, Christiane & Heinemann, Maik, 2010. "On entrepreneurial risk-taking and the macroeconomic effects of financial constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1610-1626, September.
    12. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    13. Hans Gersbach & Jean-Charles Rochet & Martin Scheffel, 2023. "Financial Intermediation, Capital Accumulation, and Crisis Recovery," Review of Finance, European Finance Association, vol. 27(4), pages 1423-1469.
    14. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 843-921, Elsevier.
    15. Marco Cagetti & Mariacristina De Nardi, 2004. "Taxation, entrepreneurship, and wealth," Staff Report 340, Federal Reserve Bank of Minneapolis.
    16. Rochet, Jean Charles & Gersbach, Hans & Scheffel, Martin, 2015. "Financial Intermediation, Capital Accumulation, and Recovery," CEPR Discussion Papers 10964, C.E.P.R. Discussion Papers.
    17. Andrea Ajello & Nina Boyarchenko & François Gourio & Andrea Tambalotti, 2022. "Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms," Staff Reports 1002, Federal Reserve Bank of New York.
    18. Polbin, Andrey & Shumilov, Andrei, 2020. "Предпринимательство, Накопление Богатства И Ограничения Заимствования: Обзор Зарубежных Исследований [Entrepreneurship, wealth accumulation and borrowing constraints: Foreign research experience]," MPRA Paper 103675, University Library of Munich, Germany.
    19. Schroth, Josef, 2023. "Capital flows and growth across developing countries," Journal of International Money and Finance, Elsevier, vol. 137(C).
    20. Suarez, Javier & Martinez-Miera, David, 2012. "A Macroeconomic Model of Endogenous Systemic Risk Taking," CEPR Discussion Papers 9134, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Credit and credit aggregates; Financial stability; Financial system regulation and policies; Lender of last resort;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:16-29. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bocgvca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.