Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/148136
Authors: 
Schroth, Josef
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper 2016-29
Abstract: 
This paper develops a model of an economy where bank credit supports both productive investment and individual consumption smoothing in the face of idiosyncratic income risk. Bank credit is constrained by bank equity capital. When policy-makers inject equity capital during financial crises, they trade off stimulating credit supply immediately against long-term distortions related to funding equity injections. I calibrate my model and show that the bank equity capital injection that maximizes average utilitarian welfare redistributes from the poor to the wealthy. While wealthy savers benefit immediately from an increased supply of safe assets, less affluent borrowers and savers suffer from long-term distortions.
Subjects: 
Financial stability
Financial system regulation and policies
Lender of last resort
Credit and credit aggregates
JEL: 
E13
E32
E44
Document Type: 
Working Paper

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