Credit spread and monetary policy

Abstract

Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.

Financial Cycle, Business Cycle and Monetary Policy: Evidence from Four Major Economies

“…In addition, as the effectiveness of macroprudential instruments has not yet been explicitly established, it may be prudent to add the action of interest rates (Agénor and Pereira da Silva, ). Similar findings are reported in other efforts (Castro, ; Ternaishi, ; Albulescu et al ., ; Baxa et al ., ).…”

Constructing a financial conditions index for the United Kingdom: A comparative analysis

“…The real share price index (RSPI) is the quarterly average of the nominal FTSE 100 index that is obtained from the OECD. Given the rationale in the literature including Driffill et al (2006), Teranishi (2012), and Castro (2011), we consider two additional indicators, credit spreads (CredSprd) and changes in the future interest rate spreads (ΔFutSprd) in an FCI. Both of them are sourced from DataStream.…”

The Financial Accelerator and Market-Based Debt Instruments: A Role for Maturities?

“…Not only does the trajectory of market prices determine returns, but market prices also affect the repayment capacity if securities are not repaid at par value. How prices of market debt affect the economy when financial frictions prevail is of economic importance because some authors claim that credit spreads, as measured by bond spreads, have a non-trivial role for monetary policy (Cúrdia and Woodford, 2010;Teranishi, 2012).…”