Economics at your fingertips  

The Effects of Government Bond Purchases on Leverage Constraints of Banks and Non-Financial Firms

Michael Kühl ()

International Journal of Central Banking, 2018, vol. 14, issue 4, 93-161

Abstract: This paper investigates how government bond purchases affect leverage-constrained banks and non-financial firms by utilizing a stochastic general equilibrium model. My results indicate that government bond purchases not only reduce nonfinancial firms' borrowing costs, amplified through a reduction in expected defaults, but also lower banks' profit margins. In an economy in which loans priced at par dominate in banks' balance sheets-as a reflection of the euro area's structure-the leverage constraint of non-financial firms is relaxed while that of banks tightens. I show that the leverage constraint in the non-financial sector plays an essential role in transmitting the impulses of government bond purchases to the real economy. In a bank-financed economy, this channel mainly controls the positive impulse on output and inflation following from government bond purchases, although the soundness of the financial sector deteriorates. This paper adds a new perspective to the discussion regarding the efficacy of government bond purchases as a policy tool.

JEL-codes: E44 E58 E61 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf) (text/html)

Related works:
Working Paper: The effects of government bond purchases on leverage constraints of banks and non-financial firms (2016) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

International Journal of Central Banking is currently edited by Loretta J. Mester

More articles in International Journal of Central Banking from International Journal of Central Banking
Bibliographic data for series maintained by Bank for International Settlements ().

Page updated 2020-06-25
Handle: RePEc:ijc:ijcjou:y:2018:q:3:a:3