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Financial Crises and Recapitalizations
Author(s) -
SANDRI DAMIANO,
VALENCIA FABIÁN
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12071
Subject(s) - recapitalization , financial intermediary , general equilibrium theory , leverage (statistics) , net worth , business cycle , financial accelerator , welfare , monetary economics , business , economics , intermediary , finance , financial system , dynamic stochastic general equilibrium , microeconomics , debt , monetary policy , macroeconomics , market economy , machine learning , computer science
We develop a dynamic stochastic general equilibrium model with financial frictions on both financial intermediaries and goods‐producing firms. Since financial intermediaries are highly leveraged, we show that the welfare gains from their recapitalization in response to large but rare net worth losses are as large as those from eliminating typical 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 can be larger when lower idiosyncratic risk leads to higher leverage.