Saving Wall Street or Main Street

74 Pages Posted: 16 May 2016

See all articles by Markus Haavio

Markus Haavio

Bank of Finland - Research

Antti Ripatti

Bank of Finland; University of Helsinki

Tuomas Takalo

Bank of Finland

Date Written: 2016

Abstract

​We build a dynamic stochastic general equilibrium model, where the balance sheets of both banks and non-financial firms play a role in macro-financial linkages. We show that in equilibrium bank capital tends to be scarce, compared with firm capital. We study public funding of banks and firms in times of crisis. Government capital injections can be useful as a shock cushion, but they distort incentives. Small capital injections benefit banks more than firms but the relative benefit is declining in the injection size. Government should first recapitalize banks, and if resources are large enough, lend to firms too.

Keywords: E44, G21, G28, G38, financial frictions, bank capitalization, public funding of non-financial firms

Suggested Citation

Haavio, Markus and Ripatti, Antti and Ripatti, Antti and Takalo, Tuomas, Saving Wall Street or Main Street (2016). Bank of Finland Research Discussion Paper No. 12/2016, Available at SSRN: https://ssrn.com/abstract=2779921 or http://dx.doi.org/10.2139/ssrn.2779921

Markus Haavio (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Antti Ripatti

University of Helsinki ( email )

P.O. Box 17
Helsinki, 00014
Finland
+358505203679 (Phone)

HOME PAGE: http://www.ripatti.net

Bank of Finland ( email )

Box 160
Helsinki, 00101
Finland

Tuomas Takalo

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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