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Unformatted text preview: e relation that I call the IS curve as the “commodities and credit curve” instead,
precisely because it is shifted by credit-supply shocks in addition to the usual determinants of the IS
curve. The framework proposed here differs from that of Bernanke and Blinder primarily in offering a
different model of the supply of intermediation. 36 Journal of Economic Perspectives to
to borrow, and hence requiring further asset sales. The result is a vicious spiral
that under some circumstances can substantially reduce credit supply. The resulting
contraction of aggregate output may result in further losses to the banks, further
reducing their capital, and hence tightening credit supply even more. The Most Recent U.S. Credit Cycle
Understanding variations in financial conditions over the most recent credit
cycle requires attention to the behavior of multiple interest rates, not just the federal
funds rate that is targeted by the Federal Reserve. As shown in Figure 5, the Fed
Open Market Com...
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