The main result of this thesis is that the effectiveness of monetary and fiscal policy is reduced in such an environment. Two channels play a key role.
The first is one where capital losses arise on existing holdings of risky government bonds held by commercial banks when the fiscal authority engages in debt-financed fiscal policy. More debt issue increases interest rates and lowers bond prices because of increased sovereign default risk. The ensuing capital losses reduce bank capital (bank equity) and therefore force commercial banks to shrink the balance sheet, with negative effects on financing investment in the real economy. This channel is at work in chapters one and two.
The second channel is at work in chapters three and four, where a change in government policy increases the attractiveness for commercial banks to hold government bonds. Because of limited balance sheet capacity after a financial crisis, commercial banks increase government bond holdings at the expense of loan provision to the real economy, which negatively affects the macroeconomy through lower investment.
If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library, or send a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible.