Working Paper: NBER ID: w17142
Authors: Lawrence Christiano; Daisuke Ikeda
Abstract: 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.
Keywords: government policy; credit markets; economic activity
JEL Codes: E42; E58; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government asset purchases (G19) | Reduction of interest rate spreads (E43) |
| Reduction of interest rate spreads (E43) | Restoration of normal functioning in financial markets (E44) |
| Decline in bank net worth (F65) | Increased interest rate spreads (E43) |
| Government interventions (equity injections and loans to banks) (H81) | Stabilization of banks' net worth (G28) |
| Stabilization of banks' net worth (G28) | Higher levels of intermediation and investment (G19) |
| Interest rate subsidies (E43) | Enhanced banks' profitability during crises (F65) |
| Enhanced banks' profitability during crises (F65) | Increased incentive to maintain deposits and support lending (G21) |