Working paper examines interactions between credit defaults and monetary policy

The Netherlands Bank

A working paper published by the Netherlands Bank investigates how credit defaults affect the real economy.

In Credit Defaults, Bank Lending and the Real Economy, Sebastiaan Pool presents a dynamic stochastic general equilibrium model including banks, firms and financial frictions using data for the eurozone.

He argues that a positive credit default shock "complicates monetary policy because output falls while inflation goes up". In those circumstances, a central bank must choose "between

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