This preview shows page 1. Sign up to view the full content.
Unformatted text preview: Cúrdia and Woodford (2010a), my coauthor and I show, in the context of a
New Keynesian dynamic stochastic general equilibrium model with credit frictions,
that such a modification of the standard Taylor rule can improve the economy’s
response to disturbances to the supply of intermediation. 15 This concept, derived from the ideas of Knut Wicksell, is discussed extensively in Woodford (2003,
chap. 4). One might alternatively define the natural rate as the real rate that would be required for
output equal to the natural rate of output under the assumption of a credit spread equal to some normal
(steady state) level; the important feature of the proposed definition is that it abstracts from the effects
of variations in the size of credit frictions.
In Cúrdia and Woodford (2009), we derive an intertemporal version of the “IS curve” in which the
credit spread appears as a shift factor. Gaspar and Kashyap (2006) were perhaps the first to propose such
a relation. 40 Journal of Economic Perspectives Alternatively,
Alternatively, a forecast-targeting approach to monetary policy of the kind I
recommended in this journal in Woodford (2007)—in which the central bank’s
View Full Document