Recapitalization in an Economy with State-Owned Banks—A DSGE Framework
Open Access
- 1 January 2020
- journal article
- research article
- Published by Scientific Research Publishing, Inc. in Theoretical Economics Letters
- Vol. 10 (01), 232-249
- https://doi.org/10.4236/tel.2020.101015
Abstract
What are the quantitative effects of a government infused bank recapitalization in response to loan defaults? We analyze two different scenarios of government infused recapitalization using a dynamic stochastic general equilibrium (DSGE) model, calibrated to an emerging market economy with state owned banks. The first is an unconditional transfer and the second is an “equity in exchange for transfer” to banks. We show that a government infused recapitalization in response to a negative productivity shock may increase output in the short run. However, there is welfare loss, which is higher in the case of unconditional transfers. Our analysis suggests that bank recapitalization facilitates credit creation, capital formation and growth, especially during a cyclical downturn. There is however a need for appropriate policy vigil to protect the quality of public expenditure in the social sector that matters for welfare in the long run.Keywords
This publication has 9 references indexed in Scilit:
- Challenges of Effective Monetary Policy in Emerging EconomiesPublished by Springer Science and Business Media LLC ,2016
- Fiscal policy in an emerging market business cycle modelThe Journal of Economic Asymmetries, 2016
- FINANCIAL NEWS, BANKS, AND BUSINESS CYCLESMacroeconomic Dynamics, 2016
- Informality, financial development and macroeconomic volatilityEconomics Letters, 2013
- Credit and Banking in a DSGE Model of the Euro AreaJournal of Money, Credit and Banking, 2010
- The Tax System in IndiaIMF Working Papers, 2006
- Business cycles in emerging economies: the role of interest ratesJournal of Monetary Economics, 2005
- Fiscal spending shocks, endogenous government spending, and real business cyclesJournal of Economic Dynamics and Control, 1996
- Output Effects of Government PurchasesJournal of Political Economy, 1981