Assessing Unconventional Monetary and Fiscal Policies
Abstract
Unprecedented nature of the global financial crisis in 2009 forced policymakers to adopt unconventional policy measures which then became part of the policy tool set that was widely used during the Covid-19 pandemic. Utilizing a New Keynesian general equilibrium model with a rich fiscal structure and financial frictions, this paper provides a comprehensive cost-benefit analysis of two such policies; credit easing and bank capital injections. In contrast to much of the existing work on unconventional policy that predominantly focuses on the benefits of these measures, our work explicitly considers the cost of paying for each policy. Interestingly, we find that both unconventional measures are welfare improving even under distortionary taxes. Compared to credit easing, the use of bank capital injections has a greater stabilizing effect on the economy and generates higher welfare gains even with lower returns to equity supplied through the latter relative to the former.
Keywords
financial crises, cerdit easing, capital injections, welfare
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