Unformatted text preview: d on the balance sheets of private intermediaries does
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 Policy and Financial Stability
Finally, the fact that a reduction in the capital of intermediaries has an adverse
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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