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Liquidity Traps and Monetary Policy: Managing a Credit Crunch

Francisco Buera () and Juan Pablo Nicolini ()

No 540, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. A tightening of the collateral constraint results in a credit-crunch-generated recession that reproduces several features of the financial crisis that unraveled in 2007 in the United States. The model can be used to study the effects of the credit-crunch on the main macroeconomic variables and the impact of alternative policies. The policy implications regarding forward guidance are in contrast with the prevalent view in most central banks, 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)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
Date: 2017-02-02
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Related works:
Working Paper: Liquidity Traps and Monetary Policy: Managing a Credit Crunch (2016) Downloads
Working Paper: Liquidity Traps and Monetary Policy: Managing a Credit Crunch (2014) Downloads
Working Paper: Liquidity Traps and Monetary Policy: Managing a Credit Crunch (2014) Downloads
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