Liquidity When It Matters Most: QE and Tobin’s q
Edward Driffill () and
Marcus Miller ()
No 8511, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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; Liquidity Shocks; Temporary Equilibrium (search for similar items in EconPapers)
JEL-codes: B22 E12 E20 E30 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-mon
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