Liquidity When It Matters Most: QE and Tobin?s q

Marcus Miller and Edward Driffill

No 8511, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: How and why do financial conditions matter for real outcomes? The ?workhorse model of money and liquidity? of Kiyotaki and Moore (2008) shows how--with full employment maintained by flexible prices--shifting credit constraints can affect investment and future aggregate supply. We show that, when the flex-price assumption is dropped, an adverse but temporary liquidity shock can rapidly lead to Keynesian-style demand failure. Optimistic expectations may speed recovery, but simulation results suggest that prompt liquidity infusion by the central bank--i.e. Quantitative Easing--is needed to check prolonged recession.

Keywords: Credit constraints; Temporary equilibrium; Liquidity shocks (search for similar items in EconPapers)
JEL-codes: B22 E12 E20 E30 E44 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-mon
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Citations: View citations in EconPapers (1)

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