Saving Wall Street or Main Street

Markus Haavio, Antti Jaakko Ripatti, Tuomas Takalo

Research output: Working paperDiscussion paperProfessional

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.
Original languageEnglish
Place of PublicationHelsinki
PublisherBank of Finland
Number of pages71
ISBN (Electronic)978-952-323-107-8
Publication statusPublished - 2016
MoE publication typeD4 Published development or research report or study

Fields of Science

  • 511 Economics
  • Financial frictions
  • bank capitalization
  • public funding of non-financial firms

Cite this

Haavio, M., Ripatti, A. J., & Takalo, T. (2016). Saving Wall Street or Main Street. (Bank of Finland Research Discussion Papers; No. 12/2016). Helsinki: Bank of Finland.