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Government Policy, Credit Markets and Economic Activity

  • Lawrence Christiano
  • Daisuke Ikeda

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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File URL: http://www.nber.org/papers/w17142.pdf
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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
Note: EFG
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