Public funding of banks and firms in a time of crisis

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Title: Public funding of banks and firms in a time of crisis
Author: Haavio, Markus ; Ripatti, Antti ; Takalo, Tuomas
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 8/2022
Year of publication: 2022
Publication date: 27.6.2022
Pages: 95
Subject (yso): taloudelliset kriisit; julkinen rahoitus; pankit; yritykset
JEL: E44; G21; G28; G38; H12; H81
Other keywords: economic crises; optimal public funding; financial frictions; macro-financial linkage
Abstract: We study public funding of banks and non-financial firms in a time of crisis. We find that bank capitalization is more effective in stabilizing the economy than direct funding to firms, but it also creates larger distortions. We show that the optimal, social-welfare-maximizing, structure of a public funding program depends on its size. Small funding programs should target banks while large programs should be directed at non-financial firms.

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