Amplification Mechanisms in Liquidity Crises

Arvind Krishnamurthy

American Economic Journal: Macroeconomics, 2010, vol. 2, issue 3, 1-30

Abstract: I describe two amplifications mechanisms that operate during crises and discuss the benefits of policy given each mechanism. The first mechanism involves asset prices and balance sheets. A negative shock to agents' balance sheets causes them to liquidate assets, lowering prices, further deteriorating balance sheets and amplifying the shock. The second mechanism involves investors' Knightian uncertainty. Unusual shocks to untested financial innovations increase agents' uncertainty about their investments, causing them to disengage from markets and amplifying the crisis. Liquidity provision by the central bank alleviates the crisis in both mechanisms. Ex ante policies such as liquidity/capital requirements may also be beneficial. (JEL E32, E44, G01, G21, G32)

JEL-codes: E32 E44 G01 G21 G32 (search for similar items in EconPapers)
Date: 2010
Note: DOI: 10.1257/mac.2.3.1
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (79)

Downloads: (external link)
http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.1 (application/pdf)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: Amplification Mechanisms in Liquidity Crises (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmac:v:2:y:2010:i:3:p:1-30

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Journal: Macroeconomics is currently edited by Simon Gilchrist

More articles in American Economic Journal: Macroeconomics from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().