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Credit Crises, Precautionary Savings, and the Liquidity Trap

Veronica Guerrieri and Guido Lorenzoni

No 17583, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers' borrowing capacity, some consumers are forced to deleverage and others increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with nominal rigidities, if the zero lower bound prevents the interest rate from adjusting downwards. Adding durable goods to the model, households take larger debt positions and the output response may be larger.

JEL-codes: E2 E4 (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mac
Note: EFG ME
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Published as Veronica Guerrieri & Guido Lorenzoni, 2017. "Credit Crises, Precautionary Savings, and the Liquidity Trap*," The Quarterly Journal of Economics, vol 132(3), pages 1427-1467.

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Journal Article: Credit Crises, Precautionary Savings, and the Liquidity Trap (2017) Downloads
Working Paper: Credit Crises, Precautionary Savings and the Liquidity Trap (2011)
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