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Credit Spreads and the Zero Bound on Interest Rates

Author

Listed:
  • Pedro Teles

    (Banco de Portugal, Universidade Catolica)

  • Oreste Tristani

    (ECB)

  • Fiorella De Fiore

    (European Central Bank)

  • Isabel Correia

    (Banco de Portugal)

Abstract

Nominal interest rates typically approach the zero-lower bound during a financial crisis. This is a constraint on optimal monetary policy: In a model with financial frictions, policy would set negative nominal interest rates in response to increases in credit spreads. We find that fiscal policy can mitigate the effect of the restriction imposed by the zero bound but cannot overcome it without incurring additional costs. The zero bound is a more severe constraint for policy due to inefficiencies in financial markets rather than to price rigidities.

Suggested Citation

  • Pedro Teles & Oreste Tristani & Fiorella De Fiore & Isabel Correia, 2013. "Credit Spreads and the Zero Bound on Interest Rates," 2013 Meeting Papers 1124, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:1124
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    File URL: https://economicdynamics.org/meetpapers/2013/paper_1124.pdf
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    References listed on IDEAS

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    1. Fiorella De Fiore & Pedro Teles & Oreste Tristani, 2011. "Monetary Policy and the Financing of Firms," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 112-142, October.
    2. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    3. Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599 Elsevier.
    4. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    5. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    6. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
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