91 Pages Posted: 20 Jun 2011
Date Written: June 2011
The US government has recently conducted large scale purchases of assets and implemented policies that reduced the cost of funds to financial institutions. Arguably these policies have helped to correct credit market dysfunctions, allowing interest rate spreads to shrink and output to begin a recovery. We study four models of financial frictions which explore different channels by which these effects might have occured. Recent events have sparked a renewed interest in leverage restrictions and the consequences of bailouts of the creditors of banks with under-performing assets. We use two of our models to consider the welfare and other effects of these policies.
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Suggested Citation: Suggested Citation
Christiano, Lawrence J. and Ikeda, Daisuke, Government Policy, Credit Markets and Economic Activity (June 2011). NBER Working Paper No. w17142. Available at SSRN: https://ssrn.com/abstract=1866101