Financial Frictions and Credit Spreads

35 Pages Posted: 29 Aug 2010 Last revised: 19 Feb 2012

See all articles by Ke Pang

Ke Pang

Wilfrid Laurier University

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics; Balsillie school of international affairs ; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2010

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 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 o set 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: Financial Frictions, Credit Spreads, Quantitative Easing, Credit Easing

JEL Classification: E43, E44, E51, E58

Suggested Citation

Pang, Ke and Siklos, Pierre L., Financial Frictions and Credit Spreads (August 1, 2010). Available at SSRN: https://ssrn.com/abstract=1667537 or http://dx.doi.org/10.2139/ssrn.1667537

Ke Pang

Wilfrid Laurier University ( email )

75 University Ave W
Waterloo, Ontario N2L 3C5
Canada

Pierre L. Siklos (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Department of Economics
75 University Avenue W.
Waterloo, Ontario N2L 3C5
Canada
519-884-0710 Ext.. 3491 (Phone)

HOME PAGE: http://pierrelsiklos.com

Balsillie school of international affairs ( email )

67 Erb Street West
Waterloo, ON N2L 6C2
Canada

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

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