Financial Frictions and Credit Spreads
AbstractThis paper uses the credit-friction model developed by Curdia and Woodford, in a series of papers, as the basis for attempting to mimic the behavior of credit spreads in moderate as well as crisis times. We are able to generate movements in representative credit spreads that are, at times, both sharp and volatile. We then study the impact of quantitative easing and credit easing. Credit easing is found to reduce spreads, unlike quantitative easing, which has opposite effects. The relative advantage of credit easing becomes even clearer when we allow borrowers to default on their loans. Since increases in default offset the beneficial effects of credit easing on spreads, the policy implication is that, in times of financial stress, the central bank should be aggressive when applying credit easing policies.
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Bibliographic InfoPaper provided by Czech National Bank, Research Department in its series Working Papers with number 2010/15.
Date of creation: Dec 2010
Date of revision:
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Credit easing; credit spread; financial friction; quantitative easing.;
Other versions of this item:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-18 (All new papers)
- NEP-BAN-2011-06-18 (Banking)
- NEP-CBA-2011-06-18 (Central Banking)
- NEP-DGE-2011-06-18 (Dynamic General Equilibrium)
- NEP-FMK-2011-06-18 (Financial Markets)
- NEP-MAC-2011-06-18 (Macroeconomics)
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