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Unformatted text preview: ve to be flatter must be balanced against the observation that a
steeper XS curve for a given level of capital in the intermediary sector will imply a steeper IS curve. This
is why the degree of amplification from credit frictions that is found in quantitative dynamic stochastic
general equilibrium models is sometimes quite modest.
The empirical dynamic stochastic general equilibrium models of Christiano, Motto, and Rostagno
(2010) and Gilchrist, Ortiz, and Zakrajsek (2009) each attribute a substantial fraction of the short-run
variability of real GDP to disturbances that vary the severity of financial frictions. 34 Journal of Economic Perspectives Figure 4
Effects of a Disruption of Credit Supply
A: Effects on the Equilibrium Credit Spread ω and Volume of Lending L
for a Given Level of Aggregate Income Y Interest rate spread
(between savers and borrowers) ω XS ω2
Volume of lending L B: Effects on the Equilibrium Policy Rate and Aggregate Income,
Taking into Account the Monetary Policy Reaction Interest rate is MP i1
Aggregate income Y Not...
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