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Liquidity Traps and Monetary Policy: Managing a Credit Crunch

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  • Francisco J. Buera
  • Juan Pablo Nicolini

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 some features of the financial crisis that unraveled in 2007 in the United States. We use the model to study the effects, following a credit crunch, of alternative monetary and fiscal policies.

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  • Francisco J. Buera & Juan Pablo Nicolini, 2020. "Liquidity Traps and Monetary Policy: Managing a Credit Crunch," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(3), pages 110-138, July.
    • Handle: RePEc:aea:aejmac:v:12:y:2020:i:3:p:110-38
    DOI: 10.1257/mac.20170040
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    2. Filiani, Pasquale, 2021. "Optimal monetary–fiscal policy in the euro area liquidity crisis," Journal of Macroeconomics, Elsevier, vol. 70(C).
    3. Azariadis, Costas & Bullard, James & Singh, Aarti & Suda, Jacek, 2019. "Incomplete credit markets and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 83-101.
    4. Cui, Wei, 2016. "Monetary–fiscal interactions with endogenous liquidity frictions," European Economic Review, Elsevier, vol. 87(C), pages 1-25.
    5. Bacchetta, Philippe & Benhima, Kenza & Kalantzis, Yannick, 2020. "Money and capital in a persistent liquidity trap," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 70-87.
    6. Sebastian Di Tella, 2018. "A Neoclassical Theory of Liquidity Traps," 2018 Meeting Papers 96, Society for Economic Dynamics.
    7. Jeffrey R. Campbell, 2014. "Quantitative Easing in Joseph's Egypt with Keynesian Producers," Working Paper Series WP-2014-15, Federal Reserve Bank of Chicago.
    8. Corbisiero, Giuseppe, 2022. "Bank lending, collateral, and credit traps in a monetary union," European Economic Review, Elsevier, vol. 144(C).
    9. Ryoji Ohdoi & Kazuo Mino & Yunfang Hu, 2023. "A heterogeneous-firm model of trade and growth with country-specific credit constraints," Discussion Paper Series 256, School of Economics, Kwansei Gakuin University.
    10. Stefano Neri & Giuseppe Ferrero, 2017. "Monetary policy in a low interest rate environment," Questioni di Economia e Finanza (Occasional Papers) 392, Bank of Italy, Economic Research and International Relations Area.
    11. Manuel Amador & Javier Bianchi, 2023. "Helicopter Drops and Liquidity Traps," Working Papers 797, Federal Reserve Bank of Minneapolis.
    12. Athanasios Geromichalos & Lucas Herrenbrueck, 2017. "The Liquidity-Augmented Model of Macroeconomic Aggregates," Discussion Papers dp17-16, Department of Economics, Simon Fraser University.
    13. Joonkyu Choi, 2018. "Entrepreneurial Risk-Taking, Young Firm Dynamics, and Aggregate Implications," 2018 Meeting Papers 1018, Society for Economic Dynamics.
    14. Francisco Buera & Juan Pablo Nicolini, 2019. "Accounting for the Slow Recovery from the Great Recession: The Role of Credit Constraints," 2019 Meeting Papers 492, Society for Economic Dynamics.
    15. Shaker Akhtekhane, Saeed, 2020. "Impact of entry costs on aggregate productivity: financial development matters," MPRA Paper 115221, University Library of Munich, Germany.
    16. Ohdoi, Ryoji, 2018. "International transmission of financial shocks without financial integration," Economics Letters, Elsevier, vol. 170(C), pages 46-49.
    17. Hagedorn, Marcus, 2018. "Prices and Inflation when Government Bonds are Net Wealth," CEPR Discussion Papers 12769, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G01 - Financial Economics - - General - - - Financial Crises
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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