Government Policy, Credit Markets, and Economic Activity^*

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. Tokyo 103-8660 JAPAN daisuke.ikeda@boj.or.jp 5 There is now a large literature devoted to constructing quantitative dynamic, stochastic general equilibrium models for evaluating the consequences of government asset purchase policies. For a partial list of this work, see

Local Government Spending Multipliers and Financial Distress: Evidence from Japanese Prefectures

“… For some recent articles, see Angeletos and Panousi (), Fernandez‐Villaverde (), or Christiano and Ikeda (). …”

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Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective

“…11 In these economies, therefore, there is scope for policy intervention to improve upon the competitive equilibrium allocation.…”

“…In fact, this coincidence implies that the amplification mechanism in the competitive equilibrium allocation induced by the constraint via its externality on the relative price is "efficient" in the sense defined above. Under conditional efficiency, therefore, financial crises might be "efficient" events that distort 11 Such a mechanism also operates if an asset price enters the collateral constraint, such as the price of a fixed stock of land (e.g., Bianchi and Mendoza, 2010, and Jeanne and Korinek, 2011a and 2011b). Suitably modified, our analysis and results extend to these alternative environments.…”

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