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In addition this alternative approach has the

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Unformatted text preview: r the policy rate should be adjusted as necessary in order for its projections of of inflation and real activity to satisfy a quantitative target criterion—will automatically cally incorporate responses to changes in financial conditions to the extent that these shift the IS curve, as in the model sketched above. In addition, this alternative approach has the advantage of not requiring the central bank to focus on a single interest rate spread when multiple aspects of financial conditions are each relevant to to aggregate demand and supply determination. “Unconventional” Monetary Policies The The model also implies that traditional interest-rate policy alone will not, in general, provide a fully adequate response to a disturbance to credit supply, no matter how large the cut in the policy rate that may be engineered. The reason is that that even if a sufficient reduction in the policy rate can offset the decline in aggregate gate demand that would otherwise result from the shift in the IS curve, this does not fully undo the distortions created by the increase in credit spreads. To the extent that savers would be willing to supply addit...
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