Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/247179 
Year of Publication: 
2020
Series/Report no.: 
Working Paper No. 910
Publisher: 
Queen Mary University of London, School of Economics and Finance, London
Abstract: 
The objective of this paper to investigate the effectiveness of credit easing policy in mitigating the economic fallout from a financial recession using a model that can account for the observed default and leverage dynamics during the financial crisis of 2007. A general equilibrium model is developed with a financial sector and endogenous asset defaults able to account for the observed default and leverage dynamics. Following an adverse aggregate shock, banks deleverage through two channels: (i) higher non-performing loans provisions, and (ii) lower the marginal return of assets. Credit policy is modelled as an expansion of the central bank's balance sheet countering the disruption in private financial intermediation. Unconventional monetary policy, namely credit easing policy, is shown to be ineffective in mitigating the effects of a financial crisis due to its crowding out effect on the private asset market. Other non-monetary policy tools such as credit subsidies and their efficacy considered.
Subjects: 
unconventional monetary policy
credit easing
credit subsidies
financialfrictions
default
leverage
financial sector
JEL: 
E20
E32
E44
E52
E58
Document Type: 
Working Paper

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