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Credit Spread and Monetary Policy

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  • Yuki Teranishi

    (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi @boj.or.jp))

Abstract

Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.

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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 09-E-14.

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Date of creation: Jun 2009
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Handle: RePEc:ime:imedps:09-e-14

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Keywords: Credit spread; optimal monetary policy;

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  1. Nao Sudo & Yuki Teranishi, 2008. "Optimal Monetary Policy under Imperfect Financial Integration," IMES Discussion Paper Series, Institute for Monetary and Economic Studies, Bank of Japan 08-E-25, Institute for Monetary and Economic Studies, Bank of Japan.
  2. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  3. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(2), pages 199-216, March.
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Cited by:
  1. Nao Sudo & Yuki Teranishi, 2008. "Optimal Monetary Policy under Imperfect Financial Integration," IMES Discussion Paper Series, Institute for Monetary and Economic Studies, Bank of Japan 08-E-25, Institute for Monetary and Economic Studies, Bank of Japan.
  2. Kühl, Michael, 2014. "The financial accelerator and market-based debt instruments: A role for maturities?," Discussion Papers 08/2014, Deutsche Bundesbank, Research Centre.
  3. Baxa, Jaromír & Horváth, Roman & Vašíček, Bořek, 2013. "Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy?," Journal of Financial Stability, Elsevier, Elsevier, vol. 9(1), pages 117-138.
  4. Albulescu, Claudiu Tiberiu, 2013. "Financial Stability and Monetary Policy: A Reduced-Form Model for the EURO Area," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 62-81, March.
  5. Christopher Martin & Costas Milas, 2010. "Financial Stability and Monetary Policy," Working Paper Series, The Rimini Centre for Economic Analysis 12_10, The Rimini Centre for Economic Analysis.
  6. Christopher Martin & Costas Milas, 2011. "Financial Crises and Monetary Policy: Evidence from the UK," Working Paper Series, The Rimini Centre for Economic Analysis 14_11, The Rimini Centre for Economic Analysis.
  7. Ito, Takatoshi, 2009. "Fire, flood, and lifeboats: policy responses to the global crisis of 2007-09," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Oct, pages 207-249.

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