Balance-Sheet Shocks and Recapitalizations

March 1, 2012

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Format: Chicago

Damiano Sandri, and Fabian Valencia. Balance-Sheet Shocks and Recapitalizations, (USA: International Monetary Fund, 2012) accessed November 21, 2024

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.

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

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/068
Stock No:

WPIEA2012068
ISBN:

9781463938451
ISSN:

1018-5941

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