[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/96981.html
   My bibliography  Save this paper

Recapitalization in an Economy with State-Owned Banks - A DSGE Framework

Author

Listed:
  • Ghosh, Saurabh
  • Gopalakrishnan, Pawan
  • Satija, Sakshi
Abstract
We simulate a DSGE model with state owned banks to analyze the impact of bank recapitalization as a policy action in response to loan defaults by firms. As a special case, we calibrate the model to India, an emerging economy with state-owned banks facing a minimum investment requirement in safe assets and a sectoral lending requirement. We analyze two different scenarios of government infused recapitalization - an unconditional transfer to banks and an "equity in exchange for transfer". Our analysis shows that a government infused recapitalization in response to a negative TFP shock may increase output in the short run. However, there is a welfare loss in both cases, although higher for the unconditional transfers as compared with the "equity in exchange for transfer". Our analysis suggests that while bank recapitalization is a welcome move to kick-start credit creation, capital formation and growth, especially during a cyclical downturn, there is need for appropriate policy vigil to protect the quality of public expenditure in the social sector that matters for welfare in the long run.

Suggested Citation

  • Ghosh, Saurabh & Gopalakrishnan, Pawan & Satija, Sakshi, 2019. "Recapitalization in an Economy with State-Owned Banks - A DSGE Framework," MPRA Paper 96981, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:96981
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/96981/1/MPRA_paper_96981.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December.
    2. Ghate, Chetan & Gopalakrishnan, Pawan & Tarafdar, Suchismita, 2016. "Fiscal policy in an emerging market business cycle model," The Journal of Economic Asymmetries, Elsevier, vol. 14(PA), pages 52-77.
    3. Fabio Panetta & Thomas Faeh & Giuseppe Grande & Corrinne Ho & Michael R King & Aviram Levy & Federico M Signoretti & Marco Taboga & Andrea Zaghini, 2009. "An assessment of financial sector rescue programmes," BIS Papers, Bank for International Settlements, number 48.
    4. Ms. Hélène Poirson, 2006. "The Tax System in India: Could Reform Spur Growth?," IMF Working Papers 2006/093, International Monetary Fund.
    5. Gunn, Christopher M. & Johri, Alok, 2018. "Financial News, Banks, And Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 22(2), pages 173-198, March.
    6. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 82(3), pages 430-450, June.
    7. Ambler, Steve & Paquet, Alain, 1996. "Fiscal spending shocks, endogenous government spending, and real business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 237-256.
    8. Mitra, Shalini, 2013. "Informality, financial development and macroeconomic volatility," Economics Letters, Elsevier, vol. 120(3), pages 454-457.
    9. Vasco J. Gabriel & Paul Levine & Joseph Pearlman & Bo Yang, 2010. "An Estimated DSGE Model of the Indian Economy," NIPE Working Papers 29/2010, NIPE - Universidade do Minho.
    10. Shesadri Banerjee & Parantap Basu & Chetan Ghate, 2020. "A Monetary Business Cycle Model For India," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1362-1386, July.
    11. Bank for International Settlements, 2018. "Structural changes in banking after the crisis," CGFS Papers, Bank for International Settlements, number 60.
    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. Bhadury, Soumya & Ghosh, Saurabh & Gopalakrishnan, Pawan, 2021. "In quest for policy 'silver bullets' towards triggering a v-shaped recovery," MPRA Paper 110905, University Library of Munich, Germany.

    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. Dave Chetan & Ghate Chetan & Gopalakrishnan Pawan & Tarafdar Suchismita, 2021. "Fiscal austerity in emerging market economies," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 25(5), pages 365-391, December.
    2. Ghosh, Saurabh & Gopalakrishnan, Pawan & Ranjan, Abhishek, 2022. "Technology shocks, banking sector policy, and the trade-off between firms and households," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 664-688.
    3. Ghate, Chetan & Gopalakrishnan, Pawan & Tarafdar, Suchismita, 2016. "Fiscal policy in an emerging market business cycle model," The Journal of Economic Asymmetries, Elsevier, vol. 14(PA), pages 52-77.
    4. Linnemann, Ludger & Schabert, Andreas, 2004. "Can fiscal spending stimulate private consumption?," Economics Letters, Elsevier, vol. 82(2), pages 173-179, February.
    5. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
    6. Adnan Haider & Musleh ud Din & Ejaz Ghani, 2012. "Monetary Policy, Informality and Business Cycle Fluctuations in a Developing Economy Vulnerable to External Shocks," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 51(4), pages 609-681.
    7. Campbell, John Y., 1994. "Inspecting the mechanism: An analytical approach to the stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 463-506, June.
    8. Eric M. Leeper & Nora Traum & Todd B. Walker, 2017. "Clearing Up the Fiscal Multiplier Morass," American Economic Review, American Economic Association, vol. 107(8), pages 2409-2454, August.
    9. Kim, Hyeongwoo & Zhang, Shuwei, 2018. "Understanding Why Fiscal Stimulus Can Fail through the Lens of the Survey of Professional Forecasters," MPRA Paper 89326, University Library of Munich, Germany.
    10. Carlson Mark A & King Thomas & Lewis Kurt, 2011. "Distress in the Financial Sector and Economic Activity," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-31, June.
    11. Shah, Sayar Ahmad & Garg, Bhavesh, 2023. "Testing policy effectiveness during COVID-19: An NK-DSGE analysis," Journal of Asian Economics, Elsevier, vol. 84(C).
    12. Angeletos, George-Marios & Panousi, Vasia, 2009. "Revisiting the supply side effects of government spending," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 137-153, March.
    13. Aleksandar Vasilev, 2021. "How quantitatively important is public investment for both business cycle fluctuations and output growth in Bulgaria (1999–2018)?," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 14(2), pages 126-141, May.
    14. Jones, John Bailey, 2002. "Has fiscal policy helped stabilize the postwar U.S. economy?," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 709-746, May.
    15. Marrinan, Jane, 1998. "Government consumption and private consumption correlations," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 615-636, August.
    16. Woon Gyu Choi & Michael B. Devereux, 2006. "Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 1-8.
    17. Patrick Fève & Julien Matheron & Jean-Guillaume Sahuc, 2011. "A Pitfall with DSGE–Based, Estimated, Government Spending Multipliers," 2011 Meeting Papers 136, Society for Economic Dynamics.
    18. Tsasa, Jean-Paul K., 2022. "Labor market volatility in a fully specified RBC search model: An analytical investigation," Journal of Mathematical Economics, Elsevier, vol. 103(C).
    19. Aleksandar Vasilev, 2022. "Is Military Spending Quantitatively Important for Business Cycle Fluctuations?," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 65(1), pages 28-51.
    20. Stylianos Asimakopoulos & Marco Lorusso & Luca Pieroni, 2021. "Can public spending boost private consumption?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1275-1313, November.

    More about this item

    Keywords

    Bank recapitalization; SLR requirements; Emerging Market Economies; Financial Frictions; state owned banks;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

    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:pra:mprapa:96981. 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: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.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.