Financial Development and Amplification

Tomohiro Hirano

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates theoretically how financial development affects the magnitude of financial amplification. Financial development yields two competing effects, balance sheet effects and shock cushioning effects. Depending on which of these forces dominates, we find that financial amplification initially increases with financial development and later falls down. Moreover, we examine the role of monetary policy to reduce financial amplification. We find that in the case of unexpected productivity shocks, money growth targeting dampens financial amplification by producing shock cushioning effects. On the other hand, inflation targeting exacerbates the shocks because under the policy, shock cushioning effects are not generated.

Keywords: Financial development; Financial amplification; Balance sheet effects; Shock cushioning effects (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Date: 2009-08-23
New Economics Papers: this item is included in nep-acc
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https://mpra.ub.uni-muenchen.de/16907/1/MPRA_paper_16907.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/21782/1/MPRA_paper_21782.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/24808/1/MPRA_paper_24808.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:16907

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