This series aims to make available to the general public and to economic policy practitioners, a selection of policy papers prepared by the staff of the International Monetary Fund. Papers in the International Economic Policy Review will offer specific policy-relevant analysis, but at a relatively non-technical level. These papers are intended to provide analytical background for IMF-supported programs and more generally to shed light on a range of policy choices facing ministries and central banks.
Clearing up bad loans and recapitalizing insolvent banks can have important allocative effects, opening the way to more efficient allocation of credit and pricing of risk. This paper discusses whether the first-round fiscal and monetary effects associated with the government’s payment of interest on recapitalization bonds are important. It first discusses a benchmark case in which these first-round effects are irrelevant, and then examines some qualifications to this result. It concludes that the fiscal impact of recapitalization does not, in general, correspond to interest paid on recapitalization bonds.
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