{
  "title": "Balance-Sheet Shocks and Recapitalizations",
  "publication": "IMF Working Papers, March 1, 2012",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/balance-sheet-shocks-and-recapitalizations-25760",
  "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/31/balance-sheet-shocks-and-recapitalizations-25760",
  "overlayPath": "/en/publications/wp/issues/2016/12/31/balance-sheet-shocks-and-recapitalizations-25760/index.md",
  "summary": "We develop a dynamic stochastic general equilibrium model with financial frictions on both financial intermediaries and goods-producing firms.",
  "sections": [
    {
      "heading": "Summary of model and approach",
      "content": "- Develops a dynamic stochastic general equilibrium model with financial frictions on both financial intermediaries and goods-producing firms.\n- Emphasizes high leverage of financial intermediaries as a key channel making balance sheet disruptions in the financial sector particularly detrimental for aggregate output."
    },
    {
      "heading": "Main findings",
      "content": "- Welfare gains from recapitalizing the financial sector in response to large but rare net worth losses are as large as those from eliminating business cycle fluctuations.\n- These welfare gains:\n  - Are increasing in the size of the net worth loss.\n  - Are larger when recapitalization funds are raised from the household sector rather than the real sector.\n  - May increase with a reduction in financial intermediaries idiosyncratic risk."
    },
    {
      "heading": "Policy-relevant implications",
      "content": "- Recapitalization of the financial sector can generate welfare improvements comparable to removing business cycle volatility, highlighting the macroeconomic importance of targeted recapitalization policies in large balance-sheet shocks.\n- The design of recapitalization funding matters: raising funds from households is associated with larger welfare gains than taxing or otherwise drawing funds from the real sector.\n- Policies that reduce financial intermediaries’ idiosyncratic risk can amplify the welfare benefits of recapitalizations."
    },
    {
      "heading": "Subject and keywords (as provided)",
      "content": "- Subject: Economic sectors; Economic theory; Financial frictions; Financial institutions; Financial sector; Labor; Nonbank financial institutions; Self-employment\n- Keywords: agency problem; balance-sheet shocks; bank bailouts; business cycle; Financial accelerator; Financial frictions; Financial sector; gains from recapitalization; Global; leverage; Nonbank financial institutions; recapitalization fund; recapitalization policy; recapitalization process; recapitalization share; Self-employment; welfare gain; WP\n\n---\n\n Content in this bundle\n\n- wp1268\n  - wp1268 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp1268 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/balance-sheet-shocks-and-recapitalizations-25760"
    }
  ],
  "bullets": [
    "[Markdown version](/en/publications/wp/issues/2016/12/31/balance-sheet-shocks-and-recapitalizations-25760/index.md)",
    "[Structured JSON version](/en/publications/wp/issues/2016/12/31/balance-sheet-shocks-and-recapitalizations-25760/index.json)",
    "[Bundle manifest](/en/publications/wp/issues/2016/12/31/balance-sheet-shocks-and-recapitalizations-25760/bundle-manifest.json)",
    "Authors: Damiano Sandri, Fabian Valencia",
    "Published: March 1, 2012",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781463938451.001",
    "Develops a dynamic stochastic general equilibrium model with financial frictions on both financial intermediaries and goods-producing firms.",
    "Emphasizes high leverage of financial intermediaries as a key channel making balance sheet disruptions in the financial sector particularly detrimental for aggregate output.",
    "Welfare gains from recapitalizing the financial sector in response to large but rare net worth losses are as large as those from eliminating business cycle fluctuations.",
    "These welfare gains:",
    "Recapitalization of the financial sector can generate welfare improvements comparable to removing business cycle volatility, highlighting the macroeconomic importance of targeted recapitalization policies in large balance-sheet shocks.",
    "The design of recapitalization funding matters: raising funds from households is associated with larger welfare gains than taxing or otherwise drawing funds from the real sector.",
    "Policies that reduce financial intermediaries’ idiosyncratic risk can amplify the welfare benefits of recapitalizations.",
    "Subject: Economic sectors; Economic theory; Financial frictions; Financial institutions; Financial sector; Labor; Nonbank financial institutions; Self-employment",
    "Keywords: agency problem; balance-sheet shocks; bank bailouts; business cycle; Financial accelerator; Financial frictions; Financial sector; gains from recapitalization; Global; leverage; Nonbank financial institutions; recapitalization fund; recapitalization policy; recapitalization process; recapitalization share; Self-employment; welfare gain; WP",
    "**_wp1268**"
  ],
  "related": [
    {
      "title": "_wp1268",
      "role": "document",
      "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1268.pdf",
      "summary": {
        "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1268.pdf.md",
        "mime": "text/markdown"
      },
      "binary": {
        "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1268.pdf",
        "mime": "application/pdf"
      }
    }
  ],
  "alternates": {
    "markdown": "/en/publications/wp/issues/2016/12/31/balance-sheet-shocks-and-recapitalizations-25760/index.md",
    "json": "/en/publications/wp/issues/2016/12/31/balance-sheet-shocks-and-recapitalizations-25760/index.json",
    "bundleManifest": "/en/publications/wp/issues/2016/12/31/balance-sheet-shocks-and-recapitalizations-25760/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-09-17T09:38:42.652Z"
}