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Instead the fact that spreads were unusually low

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Unformatted text preview: 5 with the measures of credit growth in Figure 1A shows that the increase in lending was greatest in 2006 and the first half of 2007, after the federal funds rate had already returned to a level consistent with normal benchmarks. Instead, the fact that spreads were unusually low precisely during the period of strongest growth in lending—as can be seen by comparing the spreads 13 The LIBOR rate is an average of quoted rates at which banks are able to borrow funds for a short term (3 months, in the case of the series plotted here) on an uncollateralized basis. It is important not only because it is the cost of additional funds for some banks, but because other lending rates—such as the interest rate at which commercial and industrial loans are available to firms under existing loan commitments—are often tied to the LIBOR rate. For alternative interpretations of variations in the LIBOR–OIS spread, see Giavazzi (2008), Sarkar (2009), and Taylor and Williams (2009). 38 Journal of Economic Perspectives shown...
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