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

Zhixiong Zeng

Research output: Contribution to journalArticleResearchpeer-review

10 Citations (Scopus)

Abstract

The unconventional monetary policy actions of the Federal Reserve during the recent Global Financial Crisis often involve implicit subsidies to banks. This paper offers a theory of the non-neutrality of money associated with capital injection into banks via nominal transfers, in an environment where banking frictions are present in the sense that there exists an agency 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 has real effects on the economy. We then introduce banking riskiness shocks and study optimal policy responses to such shocks.
Original languageEnglish
Pages (from-to)729 - 754
Number of pages26
JournalEconomic Theory
Volume52
Issue number2
DOIs
Publication statusPublished - 2013

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