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Balance-Sheet Shocks and Recapitalizations

Author/Editor: Sandri, Damiano | Valencia, Fabian
Authorized for Distribution: March 1, 2012
Electronic Access: Free Full Text (PDF file size is 1,397KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: We develop a dynamic stochastic general equilibrium model with financial frictions on both financial intermediaries and goods-producing firms. In this context, due to high leverage of financial intermediaries, balance sheet disruptions in the financial sector are particularly detrimental for aggregate output. We show that the 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. We also find that these gains are increasing in the size of the net worth loss, are larger when recapitalization funds are raised from the household rather than the real sector, and may increase with a reduction in financial intermediaries idiosyncratic risk.
 
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Series: Working Paper No. 12/68
Subject(s): Bankruptcy | Economic models | External shocks | Financial crisis | Financial sector | Fiscal policy | Intervention | Monetary policy | Real sector
Author's keyword(s): Financial accelerator | bank bailouts | leverage | balance-sheet shocks
 
English  
    Published:   March 1, 2012        
            Format:   Paper
    Stock No:   WPIEA2012068   Pages:   25
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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