Financial Crises and Recapitalizations

Damiano Sandri and Fabián Valencia

Journal of Money, Credit and Banking, 2013, vol. 45, issue s2, 59-86

Abstract: We develop a dynamic stochastic general equilibrium model with financial frictions on both financial intermediaries and goods‐producing firms. Since financial intermediaries are highly leveraged, we show that the welfare gains from their recapitalization in response to large but rare net worth losses are as large as those from eliminating typical business cycle fluctuations. We also find that these gains are increasing in the size of the net worth loss, are larger when recapitalization funds are raised from the household rather than the real sector, and can be larger when lower idiosyncratic risk leads to higher leverage.

Date: 2013
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https://doi.org/10.1111/jmcb.12071

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:45:y:2013:i:s2:p:59-86

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