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Credit Spreads and Monetary Policy

  • VASCO CURDIA
  • MICHAEL WOODFORD

We consider the desirability of modifying a standard Taylor rule for interest rate policy to incorporate adjustments for measures of financial conditions. We consider the consequences of such adjustments for the way policy would respond to a variety of disturbances, using the dynamic stochastic general equilibrium model with credit frictions developed in C�rdia and Woodford (2009a). According to our model, an adjustment for variations in credit spreads can improve upon the standard Taylor rule, but the optimal size of adjustment depends on the source of the variation in credit spreads. A response to the quantity of credit is less likely to be helpful. Copyright (c) 2010 The Ohio State University.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 42 (2010)
Issue (Month): s1 (09)
Pages: 3-35

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Handle: RePEc:mcb:jmoncb:v:42:y:2010:i:s1:p:3-35
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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