Credit Spreads and Credit Policies

Isabel Correia (), Pedro Teles, Oreste Tristani and Fiorella De Fiore

No 9989, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: How should monetary and fiscal policy react to adverse financial shocks? If monetary policy is constrained by the zero lower bound on the nominal interest rate, subsidising the interest rate on loans is the optimal policy. The subsidies can mimic movements in the interest rate and can therefore overcome the zero bound restriction. Credit subsidies are optimal irrespective of how they are financed. If debt is not state contingent, they result in a permanent increase in the level of public debt and future taxes, and in a permanent reduction in output.

Keywords: Banks; Credit policies; Credit subsidies; Monetary policy; Zero bound on interest rates (search for similar items in EconPapers)
JEL-codes: E31 E40 E44 E52 E58 E62 E63 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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