Thus to the extent that it is possible for policy to

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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 to maintain output at potential. But 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 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...
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This note was uploaded on 11/23/2013 for the course ECON 11837649 taught by Professor Batchelder during the Spring '10 term at Pepperdine.

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