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Progress and ConfusionThe State of Macroeconomic Policy$
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Olivier Blanchard, Raghuram G. Rajan, Kenneth S. Rogoff, and Lawrence H. Summers

Print publication date: 2016

Print ISBN-13: 9780262034623

Published to MIT Press Scholarship Online: January 2017

DOI: 10.7551/mitpress/9780262034623.001.0001

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The Credit Surface and Monetary Policy

The Credit Surface and Monetary Policy

Chapter:
(p.143) 15 The Credit Surface and Monetary Policy
Source:
Progress and Confusion
Author(s):

John Geanakoplos

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262034623.003.0015

This chapter argues that central banks should influence risky interest rates if they want to preserve financial stability. It introduces the concept of the credit surface, which traces the rate at which firms and households can borrow on the basis their credit score and the value of their collateral. The chapter makes the case that monitoring the credit surface would provide a framework for discussing monetary policy and its effects. Central banks could intervene on the credit surface by influencing the riskless interest rate and by directly influencing risky debt, for example by adjusting loan-to-value thresholds. The chapter also discusses the possibility of using debt forgiveness as a policy tool.

Keywords:   monetary policy, credit surface, risky debt, default

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