NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Government Policy, Credit Markets and Economic Activity

Lawrence Christiano, Daisuke Ikeda

NBER Working Paper No. 17142
Issued in June 2011
NBER Program(s):   EFG

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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This paper was revised on January 19, 2012

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Document Object Identifier (DOI): 10.3386/w17142

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