Unformatted text preview: ional funds at an interest rate lower than
the rate at which borrowers would be willing to borrow additional funds, then there
remains a misallocation of expenditure, even if the aggregate level of expenditure is
optimal: on this point, in Cúrdia and Woodford (2009), my coauthor and I provide
an explicit welfare analysis. Thus, to the extent that it is possible for policy to reduce
the size of the credit spread, this is desirable, even when interest-rate policy is able
to maintain output at potential.
But the case for acting to reduce credit spreads becomes even stronger if
the policy rate is constrained by the zero lower bound on nominal interest rates.
In the case of a large enough disturbance to the supply of intermediation, the IS
curve may shift so far down to the left that the point on it corresponding to the
natural rate of output may involve a negative nominal interest rate; for quantitative
tative examples, see Cúrdia and Woodford (2010b). In this case, conventional
monetary policy is unable to achieve the required level of aggregate demand,
because even a massive expansion of the supply of bank reserves cannot drive the
policy rate b...
View Full Document