Security

Government Policy, Credit Markets And Economic Activity

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Executive Summary

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. The authors study four models of financial frictions which explore different channels by which these effects might have occurred. Recent events have sparked a renewed interest in leverage restrictions and the consequences of bailouts of the creditors of banks with under-performing assets. They use two of the models to consider the welfare and other effects of these policies.

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