Real-financial Linkages through Loan Default and Bank Capital

Tamon Takamura ()

Staff Working Papers from Bank of Canada

Abstract: Many studies in macroeconomics argue that financial frictions do not amplify the impacts of real shocks. This finding is based on models without endogenous default on loans and bank capital. Using a model featuring endogenous interactions between firm default and bank capital, this paper revisits the propagation mechanisms of real and financial shocks. The model, calibrated to the US economy, shows that real shocks translate into a financial problem and cause persistent business cycle fluctuations through countercyclical firm default and interest-rate spread. Consistent with the previous studies, financial shocks lead the economy into booms and recessions, notably during the US financial crisis. Capital injections to banks through the Troubled Asset Relief Program were an effective policy response for mitigating the vicious cycle between loan default and interest-rate spread.

Keywords: Financial institutions; Financial stability; Financial system regulation and policies; Interest rates (search for similar items in EconPapers)
JEL-codes: E3 E32 E4 E44 E6 E69 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2013/01/wp2013-03.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:13-3

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().