The Distributional Effects of Bailouts

Yu-Ting Chiang, Mikayel Sukiasyan () and Piotr Żoch
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Yu-Ting Chiang: https://research.stlouisfed.org/econ/chiang/oc/
Mikayel Sukiasyan: https://www.amazon.science/author/mikayel-sukiasyan

Review, 2025, vol. 107, issue 17, 10 pages

Abstract: This article examines the distributional effects of government bailouts using a heterogeneous agent New Keynesian model with financial intermediation frictions. We analyze government equity injections to financial institutions financed by debt issuance, capturing essential features of bailout policies during financial crises. When calibrated to match key features of the U.S. economy, bailout policies are expansionary and reduce inequality through general equilibrium effects operating primarily via aggregate demand stimulation and increased labor income rather than direct wealth effects. Equity injections increase the financial sector’s capacity to intermediate capital, leading to higher capital prices, increased investment, and substantial aggregate demand increases. This improves labor market conditions that benefit lower-income households more than wealth effects benefit the wealthy. The result is reduced wealth and consumption inequality, demonstrating that bailouts can simultaneously achieve macroeconomic stabilization and inequality reduction.

Keywords: heterogenous agent New Keynesian (HANK); equity injections; financial institutions; financial crises; bailouts; labor market conditions; macroeconomic stability; inequality (search for similar items in EconPapers)
JEL-codes: E2 E6 H3 H6 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlrv:102054

DOI: 10.20955/r.2025.17

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