Unformatted text preview: elow zero. (The Federal Reserve found itself in this situation after
December 2008, as shown in Figure 5.) Under such circumstances, a policy that
can reduce credit spreads can further increase aggregate demand (by shifting
the IS curve to the right), despite the lack of room for any further reduction in
the policy rate.
Broadly speaking, two types of “unconventional” central-bank policies can
reduce credit spreads by shifting the supply of intermediation schedule XS to the
right. One is the extension of credit to intermediaries by the central bank on easier
terms than are available from private creditors; in particular, in the case that the
relevant financing constraint is the existence of too-high margin requirements for
private lending using assets held by the intermediaries as collateral, the central
bank may choose to lend against that collateral with a lower margin requirement. Financial Intermediation and Macroeconomic Analysis 41 Ashcraft,
Ashcraft, Gârleanu, and Pedersen (forthcoming) discuss the Federal Reserve’s Term
Asset-Backed Lending Facility, which provided financing for private purchases of
asset-backed securities, as an example...
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