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Government Policy, Credit Markets and Economic Activity

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  • Lawrence Christiano
  • Daisuke Ikeda

Abstract

The US government has recently conducted large scale purchases of assets and implemented policies that reduced the cost of funds to financial institutions. Arguably these policies have helped to correct credit market dysfunctions, allowing interest rate spreads to shrink and output to begin a recovery. We study four models of financial frictions which explore different channels by which these effects might have occured. Recent events have sparked a renewed interest in leverage restrictions and the consequences of bailouts of the creditors of banks with under-performing assets. We use two of our models to consider the welfare and other effects of these policies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17142.

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Date of creation: Jun 2011
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Handle: RePEc:nbr:nberwo:17142

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Cited by:
  1. Markus Kirchner & Sweder van Wijnbergen, 2012. "Fiscal Deficits, Financial Fragility, and the Effectiveness of Government Policies," Tinbergen Institute Discussion Papers 12-044/2, Tinbergen Institute.
  2. George Kapetanios & Haroon Mumtaz & Ibrahim Stevens & Konstantinos Theodoridis, 2012. "Assessing the Economy‐wide Effects of Quantitative Easing," Economic Journal, Royal Economic Society, vol. 122(564), pages F316-F347, November.
  3. Jaromir Benes & Michael Kumhof, 2011. "Risky Bank Lending and Optimal Capital Adequacy Regulation," IMF Working Papers 11/130, International Monetary Fund.
  4. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2012. "Financial Intermediation, Exchange Rates, and Unconventional Policy in an Open Economy," NBER Working Papers 18431, National Bureau of Economic Research, Inc.
  5. Martina Cecioni & Giuseppe Ferrero & Alessandro Secchi, 2011. "Unconventional Monetary Policy in Theory and in Practice," Questioni di Economia e Finanza (Occasional Papers) 102, Bank of Italy, Economic Research and International Relations Area.
  6. Villa, Stefania, 2013. "Financial frictions in the euro area: a Bayesian assessment," Working Paper Series 1521, European Central Bank.

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