Capital injection, monetary policy, and financial accelerators

Naohisa Hirakata, Nao Sudo, Kozo Ueda

    Research output: Contribution to journalArticle

    7 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

    Fingerprint

    Monetary policy
    Financial accelerator
    Injection
    Taylor rule
    Financial intermediaries
    Entrepreneurs
    Credit market imperfections
    Welfare implications
    External finance
    Economic downturn
    Credit

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

    Cite this

    Capital injection, monetary policy, and financial accelerators. / Hirakata, Naohisa; Sudo, Nao; Ueda, Kozo.

    In: International Journal of Central Banking, Vol. 9, No. 2, 06.2013, p. 101-145.

    Research output: Contribution to journalArticle

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