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Would a Bagehot style corporate bond backstop have helped counter the Great Recession?

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  • Duca, John V.
  • Murphy, Anthony

Abstract

In 2008, US corporate bond spreads almost reached Great Depression levels. The Fed was a lender of last resort in commercial paper, but not corporate bonds. The Fed’s FRB/US macroeconomic model is used to simulate the effects of the Fed successfully capping the BBB-10 year Treasury spread at 100 basis points above the 1970–2006 average spread. The simulations suggest that real GDP might have been one percentage point higher and the unemployment rate one-half percentage point lower.

Suggested Citation

  • Duca, John V. & Murphy, Anthony, 2013. "Would a Bagehot style corporate bond backstop have helped counter the Great Recession?," Economics Letters, Elsevier, vol. 119(3), pages 351-353.
    • Handle: RePEc:eee:ecolet:v:119:y:2013:i:3:p:351-353
    DOI: 10.1016/j.econlet.2013.02.010
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    References listed on IDEAS

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    Cited by:

    1. Kettemann, Andreas & Krogstrup, Signe, 2014. "Portfolio balance effects of the Swiss National Bank’s bond purchase program," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 132-149.
    2. Bordo, Michael D. & Duca, John V., 2022. "How new Fed corporate bond programs cushioned the Covid-19 recession," Journal of Banking & Finance, Elsevier, vol. 136(C).

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    More about this item

    Keywords

    Corporate bond spread; Lender of last resort; Financial frictions; Great Recession;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-

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