ECOS3021 1 Lecture 8 Credit Market Imperfections & the Business Cycle Aim: •Understand the role of credit and financial intermediation in understanding business cycles by study theoretical models relating the credit market to the business cycle •Understand the credit spread and examine empirical evidence Conventional equilibrium business cycle (e.g. RBC) models studied in Lecture 2 ignore financial imperfections or credit market failures. First, we study a simple model of financial intermediation shown in Woodford (2010). Monetary authority targets the short-term lending rate (long-term rate is influenced also by the expectation about inflation and future activities). There is a gap between the interest rate paid and received (non-bank public) by the non-bank public who save and also borrow. ω= ib– is, the interest spread (premium)
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