Capital Injection, Monetary Policy, and Financial Accelerators

Naohisa Hirakata, Nao Sudo and Kozo Ueda

No 11-E-10, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

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 the credit market imperfection: financial intermediaries (FIs) and entrepreneurs. Using a model calibrated to the United States, 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. Although the welfare implication of these policies varies depending on the source of economic downturn, our result shows more support for adopting the spread-adjusted Taylor rules than capital injections.

Keywords: Financial Accelerators; Spread-adjusted Taylor rule; Capital Injection (search for similar items in EconPapers)
JEL-codes: E31 F52 (search for similar items in EconPapers)
Date: 2011-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (16)

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Journal Article: Capital Injection, Monetary Policy, and Financial Accelerators (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:11-e-10

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