In crdia and woodford 2010b we assume costs of

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Unformatted text preview: d on the balance sheets of private intermediaries does not not change.17 It It should not be assumed that because it is possible in principle for the central bank to reduce equilibrium spreads through direct intervention in credit markets, it is therefore desirable for the central bank to intervene continually to maintain zero spreads. In Cúrdia and Woodford (2010b), we assume costs of central-bank lending to the private sector that imply that under normal circumstances, it will not be optimal for the central bank to hold assets other than highly liquid Treasury securities on its balance sheet; but even so, central-bank lending to the private sector can be justified on welfare grounds in the case of a large enough disruption of credit supply. Gertler and Karadi (2010) reach a similar conclusion using a related model. Monetary Monetary Policy and Financial Stability Finally, Finally, the fact that a reduction in the capital of intermediaries has an adverse effect effect on the supply of intermediation—which in turn can seriously disturb both aggregate gate demand and the composition of expenditure—implies that it...
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