In this paper, we examine how a decrease in firms' productivity or the degree of financial market imperfection affects macroeconomic dynamics when the bank has an incentive to misallocate its credit. We develop a model that incorporates a soft budget constraint into a simplified version of...

In this paper, we examine how a decrease in firms’ productivity or the degree of financial market imperfection affects macroeconomic dynamics when the bank has an incentive to misallocate its credit. We develop a model that incorporates a soft budget constraint into a simplified version of...

This paper investigates the effect of monetary policy in a situation where soft budget constraint problems prevail in the economy and the bank faces a capital requirement. Under these circumstances, an expansionary monetary policy may increase quantity of bank lending without improving the...