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

MPRA Paper from University Library of Munich, Germany

Abstract: Policy actions by the Federal Reserve during the recent financial crisis often involve recapitalization of banks. This paper offers a theory of the non-neutrality of money for policy actions taking the form of injecting capital into banks via nominal transfers, in an environment where banking frictions are present in the sense that there exists an agency cost 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 can have real effects on the economy. We then study the design of the optimal long-run recapitalization policy as well as the optimal short-run policy responses to banking riskiness shocks.

Keywords: Banking frictions; two-sided debt contract; money neutrality; unconventional monetary policy; reaction function. (search for similar items in EconPapers)
JEL-codes: D82 E44 E52 (search for similar items in EconPapers)
Date: 2010-08-25
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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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 (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:24752

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