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Animal spirits and credit spreads in a model with a cost channel

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  • Bofinger, Peter
  • Debes, Sebastian
  • Gareis, Johannes
  • Mayer, Eric

Abstract

Shocks in the financial sector caused the great recession of 2008 and pulled down the real economy. To implement financial dynamics in a stylized DSGE-framework we use behavioral elements in expectations to produce waves of bull and bear cycles in the financial intermediation process, that have repercussions on the business cycle dynamics. Our main findings suggest that rapid interest rate reduction and a countercyclical equity regulation in the finance sector can well prevent severe recessions. --

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Bibliographic Info

Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis with number 48688.

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Date of creation: 2011
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Handle: RePEc:zbw:vfsc11:48688

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Web page: http://www.socialpolitik.org/
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Keywords: Animal spirits; bank regulation; financial intermediation; monetary policy;

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  1. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 199-216, March.
  2. Vasco Cúrdia & Michael Woodford, 2009. "Credit Spreads and Monetary Policy," Discussion Papers 0910-01, Columbia University, Department of Economics.
  3. Mayer, Eric & Scharler, Johann, 2011. "Noisy information, interest rate shocks and the Great Moderation," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 568-581.
  4. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
  5. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and Banking in a DSGE Model of the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 107-141, 09.
  6. Bofinger, Peter & Debes, Sebastian, 2010. "A primer on unconventional monetary policy," CEPR Discussion Papers 7755, C.E.P.R. Discussion Papers.
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