Capital Injection, Monetary Policy, and Financial Accelerators

Naohisa Hirakata, Nao Sudo and Kozo Ueda

International Journal of Central Banking, 2013, vol. 9, issue 2, 101-145

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.

JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (29)

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Related works:
Working Paper: Capital Injection, Monetary Policy, and Financial Accelerators (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2013:q:2:a:6

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