Discussion of "Capital Injection to Banks versus Debt Relief to Households"

Jinhyuk Yoo asks an important and interesting question in this paper: if policymakers have to choose between providing debt relief to households versus injecting new capital into banks, how should they evaluate the choice? The paper addresses this question through the lens of a DSGE model, and makes the case that household debt relief is more potent than capital injection for banks as a stimulus measure in the midst of a recession drive by household debt like the one the United States experienced in 2008. Amir Sufi and I also came to a similar conclusion in our 2014 book House of Debt. In my comments below, I will first describe the intuition behind the key result in Yoo's work. I then discuss the empirical relevance of the model's assumption and implications in light of the increasing body of work that has come about since the great recession. Finally, I discuss a conceptual extension of the model that Yoo presents to highlight some important questions for further inquiry.