Financial Frictions and Credit Spreads

Ke Pang () and Pierre Siklos

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: 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 crisis times. 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.

Keywords: Credit easing; credit spread; financial friction; quantitative easing. (search for similar items in EconPapers)
JEL-codes: E43 E44 E51 E58 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fmk and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.cnb.cz/export/sites/cnb/en/economic-re ... wp/cnbwp_2010_15.pdf

Related works:
Working Paper: Financial Frictions and Credit Spreads (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2010/15

Access Statistics for this paper

More papers in Working Papers from Czech National Bank, Research and Statistics Department Contact information at EDIRC.
Bibliographic data for series maintained by Tomas Karhanek ().