Social Welfare Analysis of Policy-based Finance with Support for Corporate Loan Interest

2021 KDI Journal of Economic Policy  
We analyze the social welfare effect when a policy-based financial system (PFS) enters a decentralized financial market. Particularly, the PFS in this case supports the interest spread for corporate loans held by firms with heterogeneous bankruptcy decisions under an imperfect information structure. Although support for capital costs through the PFS expands the economy consistently, the optimal level of PFS out of the corporate loan market is estimated to be 8.6% by a simulation model
more » ... g social welfare adjusted by the disutility of labor. This result is much lower than the recent level of PFS in the Korean financial sector.
doi:10.23895/kdijep.2021.43.4.45 doaj:b35d69e59c2e4104b6ca71e896f9da5d fatcat:5ht6yiuuzbf5vphlhgbmx4fppu