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Financial Frictions And Credit Spreads

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Executive Summary

This paper uses the credit-friction model developed by Curdia and Woodford, in a series of papers, as the basis for attempting to mimic the behavior of credit spreads in moderate as well as in times of crisis. The authors are able to generate movements in representative credit spreads that are, at times, both sharp and volatile. They then study the impact of quantitative easing and credit easing. Credit easing is found to reduce spreads unlike quantitative easing which has opposite effects.

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