Capital injection, monetary policy, and financial accelerators

Naohisa Hirakata, Nao Sudo, Kozo Ueda

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8 Citations (Scopus)

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 credit market imperfection: financial intermediaries (FIs) and entrepreneurs. With the model estimated using the U.S. data, 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. Our result shows support for adopting the spread-adjusted Taylor rules and capital injections, although welfare implication varies depending on the source of economic downturn and excessive responses aggravate welfare.

Original languageEnglish
Pages (from-to)101-145
Number of pages45
JournalInternational Journal of Central Banking
Volume9
Issue number2
Publication statusPublished - 2013 Jun 1

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ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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