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تزریق پول
A sufficiently large monetary injection eliminates the bad equilibrium.
However, the size of the monetary injection required to eliminate the equilibrium is smaller if the central bank provides loans to banks, in comparison to using an asset purchase policy.
I then use this framework to study whether the central bank can eliminate a banking panic using monetary injections.
This approach not only is more consistent with the data but also creates novel policy results because monetary injections generate non-trivial general equilibrium effects on the amount of resources intermediated by the financial sector.
My model can also highlight general equilibrium effects of monetary injections that increase deposits without eliminating the bad equilibrium, and even effects that reduce banks' deposits, which in turn weaken the effectiveness of such monetary injections.
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