Did the TARP Expand or Contract Bank Lending? A Numerical Simulation Using a Financial Accelerator Model

Yuki Takahashi

Economics Bulletin, 2015, vol. 35, issue 2, 1154-1159

Abstract: This paper examines whether capital injections implemented under the Troubled Assets Relief Program (TARP) expanded or contracted bank lending within a general equilibrium framework. Using Gertler and Kiyotaki (2010)'s financial accelerator model, an economy that is hit by a financial crisis but injects government capital into its banks as a policy response is simulated. The simulation results imply that the TARP capital injections were likely to have contracted bank lending. However, the simulation results do not rule out the possibility that the TARP capital injections benefited the economy through channels other than lending expansion. These implications contribute to the literature on the effectiveness of the TARP capital injections on bank lending, which has been a subject of empirical studies.

Keywords: bank; crisis; TARP; capital injection; dynamic stochastic general equilibrium; financial accelerator (search for similar items in EconPapers)
JEL-codes: E4 G2 (search for similar items in EconPapers)
Date: 2015-05-14
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