December 28, 2012
Nao Sudou*

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Abstract

In this paper, we explore the roles played by reference rates in business cycle fluctuations using a medium-scale full-fledged dynamic stochastic general equilibrium (DSGE) model. Our model is an extended model of chained-credit-contract model developed by Hirakata, Sudo, and Ueda (2011) estimated by the Japanese data. In our economy, there are interbank as well as lending markets. Credit spreads determined in the markets are affected by the borrowers' creditworthiness and degree of informational friction in the credit markets. Focusing on the role of reference rates that affects economic decisions through the delivery of information about the nature of economy, we evaluate channels through which the reference rates affects credit spreads and macroeconomic activities. We find that (i) reference rates may mitigate informational friction in the credit markets, leading to a higher investment, output, and inflation, (ii) reference rates may contribute to economic stabilization by providing accurate economic forecast, and (iii) reference rates may bring about unintended consequence of monetary policy implementation by adding a noise to the credit spreads. Our results indicate the importance of reliable reference rates, particularly under the environment where uncertainty prevails, from the perspective of resource allocation, stabilization, and policy implementation.

Keywords
Reference Rates; Credit Spreads; Informational Friction, Signal Extraction, Monetary Policy

The author would like to thank Kosuke Aoki, Ichiro Fukunaga, Jacob Gyntelberg, Daisuke Ikeda, Selahattin Imrohoroglu, Sohei Kaihatsu, Koichiro Kamada, Ryo Kato, Tomiyuki Kitamura, Shun Kobayashi, Marco Lombardi, Koji Nakamura, Kenji Nishizaki, Yukisato Ohta, Masashi Saito, Yuki Teranishi, Yuki Uchida, Yoichi Ueno, and Hiromi Yamaoka for their useful comments. Views expressed in this paper are those of the author and do not necessarily reflect the official views of the Bank of Japan.

*	Director, International Division, Financial System and Bank Examination Department E-mail : nao.sudou@boj.or.jp

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