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Animal spirits and credit spreads in a model with a cost channel

Peter Bofinger (), Sebastian Debes, Johannes Gareis and Eric Mayer

Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis from Verein für Socialpolitik / German Economic Association

Abstract: Shocks in the financial sector caused the great recession of 2008 and pulled down the real economy. To implement financial dynamics in a stylized DSGE-framework we use behavioral elements in expectations to produce waves of bull and bear cycles in the financial intermediation process, that have repercussions on the business cycle dynamics. Our main findings suggest that rapid interest rate reduction and a countercyclical equity regulation in the finance sector can well prevent severe recessions.

Keywords: Animal spirits; bank regulation; financial intermediation; monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E52 G21 (search for similar items in EconPapers)
Date: 2011
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