Credit Traps

Efraim Benmelech and Nittai K. Bergman

No 16200, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the limitations of monetary policy transmission within a credit channel frame- work. We show that, under certain circumstances, the credit channel transmission mechanism fails in that liquidity injections by the central bank into the banking sector are hoarded and not lent out. We use the term 'credit traps' to describe such situations and show how they can arise due to the interplay between financing frictions, liquidity, and collateral values. Our analysis offers a characterization of the problems created by credit traps as well as potential solutions and policy implications. Among these, the analysis shows how quantitative easing and fiscal policy acting in conjunction with monetary policy may be useful in increasing bank lending. Further, the model shows how small contractions in monetary policy or in loan supply can lead to collapses in lending, aggregate investment, and collateral prices.

JEL-codes: E44 E51 E58 G01 G32 G33 (search for similar items in EconPapers)
Date: 2010-07
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
Note: AP CF ME
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Citations: View citations in EconPapers (1)

Published as Efraim Benmelech & Nittai K. Bergman, 2012. "Credit Traps," American Economic Review, American Economic Association, vol. 102(6), pages 3004-32, October.

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