Liquidity Traps and Monetary Policy: Managing a Credit Crunch

Francisco Buera and Juan Pablo Nicolini

No 714, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. These two frictions give rise to a nontrivial financial market in a monetary economy. A tightening of the collateral constraint results in a recession generated by a credit crunch. The model can be used to study the effects on the main macroeconomic variables, and on the welfare of each individual of alternative monetary and fiscal policies following the credit crunch. The model reproduces several features of the recent financial crisis, such as the persistent negative real interest rates, the prolonged period at the zero bound for the nominal interest rate, and the collapse in investment and low inflation in spite of the very large increases in liquidity adopted by the government. The policy implications are in sharp contrast to the prevalent view in most central banks, which is based on the New Keynesian explanation of the liquidity trap.

Keywords: Liquidity trap; Credit crunch; collateral constraints; Monetary policy; Ricardian equivalence (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 E63 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2014-07-18
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Liquidity Traps and Monetary Policy: Managing a Credit Crunch (2020)
Working Paper: Liquidity Traps and Monetary Policy: Managing a Credit Crunch (2017)
Working Paper: Liquidity Traps and Monetary Policy: Managing a Credit Crunch (2016)
Working Paper: Liquidity Traps and Monetary Policy: Managing a Credit Crunch (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:714

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