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Saving Wall Street or main street

Author

Listed:
  • Haavio, Markus
  • Ripatti, Antti
  • Takalo, Tuomas
Abstract
​We build a dynamic stochastic general equilibrium model, where the balance sheets of both banks and non-financial firms play a role in macro-financial linkages. We show that in equilibrium bank capital tends to be scarce, compared with firm capital. We study public funding of banks and firms in times of crisis. Government capital injections can be useful as a shock cushion, but they distort incentives. Small capital injections benefit banks more than firms but the relative benefit is declining in the injection size. Government should first recapitalize banks, and if resources are large enough, lend to firms too.

Suggested Citation

  • Haavio, Markus & Ripatti, Antti & Takalo, Tuomas, 2016. "Saving Wall Street or main street," Bank of Finland Research Discussion Papers 12/2016, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2016_012
    as

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    File URL: https://www.econstor.eu/bitstream/10419/212350/1/bof-rdp2016-012.pdf
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    References listed on IDEAS

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    Cited by:

    1. Silvo, Aino, 2018. "Information and credit cycles: Causes and consequences of financial instability," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number e52, July.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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