Financial Frictions and Credit Spreads

Ke Pang () and Pierre Siklos

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper uses the credit-friction model developed by C?urdia 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. We are able to generate movements in representative credit spreads that are, at times, both sharp and volatile. We then study the impact of quantitative easing and credit easing. Credit easing is found to reduce spreads unlike quantitative easing which has opposite effects. The relative advantage of credit easing becomes even clearer when we allow borrowers to default on their loans. Since increases in default offset the beneficial effects of credit easing on spreads, the policy implication is that, in times of financial stress, the central bank should be aggressive when applying credit easing policies.

JEL-codes: E43 E44 E51 E58 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2010-10
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Financial Frictions and Credit Spreads (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2010-28

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