A theory of the non-neutrality of money with banking frictions and bank recapitalization

Zhixiong Zeng

MPRA Paper from University Library of Munich, Germany

Abstract: The unconventional monetary policy actions of the Federal Reserve during the recent Global Financial Crisis often involve implicit subsidies to banks. This paper offers a theory of the non-neutrality of money associated with capital injection into banks via nominal transfers, in an environment where banking frictions are present in the sense that there exists an agency problem between banks and their private-sector creditors. The analysis is conducted within a general equilibrium setting with two-sided financial contracting. We first show that even with perfect nominal flexibility, the recapitalization policy has real effects on the economy. We then introduce banking riskiness shocks and study optimal policy responses to such shocks.

Keywords: Bankruptcy of banks; banking riskiness shocks; two-sided debt contract; unconventional monetary policy; financial crisis (search for similar items in EconPapers)
JEL-codes: D82 D86 E44 E52 (search for similar items in EconPapers)
Date: 2011-08-15
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: A theory of the non-neutrality of money with banking frictions and bank recapitalization (2013)
Working Paper: A theory of the non-neutrality of money with banking frictions and bank recapitalization (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:33471

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