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A model of this kind is sketched below for a

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Unformatted text preview: ced by those to whom wealth was redistributed. A model of this kind is sketched below. For a quantitative analysis of the effects of the fall in U.S. housing prices prices that stresses such effects, see Greenlaw, Hatzius, Kashyap, and Shin (2008). Banking and the Money Supply It It is also difficult to understand why large losses by financial institutions on housing-related bets should have such a significant effect on the real economy without a model that takes account of credit frictions. According to the well-known monetarist view, banking crises affect the economy because they reduce the total supply of money in the economy, since the “money multiplier”—the factor by which Michael Woodford 23 the the economy’s money supply exceeds the “monetary base” supplied by the central bank—falls when funds are withdrawn from commercial banks in response to concerns about their stability. The lower money supply is then only consistent with money demand to the extent that money demand is also reduced, th...
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