Unconventional Credit Policy in an Economy with Supply and Demand Credit Frictions.

In this paper we develop a DSGE model where we reconcile credit demand and supply frictions and evaluate the effects of an unconventional credit policy. The credit policy consists on central bank loans to firms that are directly provided by the central bank or through commercial banks and they are guaranteed by the government. Credit supply frictions allow us to mimic a more realistic dynamics of credit after a monetary policy shock. We find that the credit policy diminishes the impact of a negative shock in the economy. Since central bank loans are not subject to the moral hazard problem between bankers and depositors, credit market interventions rise aggregate credit supply. The government guarantees reduce entrepreneurs’ default probability and hence increases aggregate credit demand. In periods of high uncertainty government guarantees’ effects become very significant. Also, when bank loans have a higher seniority than central bank loans, the effectiveness of the credit policy on reducing real fluctuations increases.