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Liquidity when it matters: QE and Tobin's q

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  • John Driffill
  • Marcus Miller

Abstract

The model of credit-constrained investors developed by Kiyotaki and Moore is used to analyse 'unconventional monetary policy' actions taken in the US and UK. We make two contributions. The first is expositional--to show that their model of a liquidity crisis can be represented as a two-equation dynamic system in K (the aggregate capital stock) and q (Tobin's q, the price of capital goods) with saddle-point dynamics. This allows for an intuitive, graphical exposition of the issues and results. The second is to show how a liquidity crisis leads to a deep recession when the assumption of perfect wage and price flexibility is replaced by downwardly rigid wages and prices. As in Del Negro et al., we show how central bank policies to increase liquidity can ameliorate the recession: but we use our simplified model for the purpose. Further, we analyse how fiscal intervention can help combat recession. Copyright 2013 Oxford University Press 2013 All rights reserved, Oxford University Press.

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  • John Driffill & Marcus Miller, 2013. "Liquidity when it matters: QE and Tobin's q," Oxford Economic Papers, Oxford University Press, vol. 65(suppl_1), pages 115-145, April.
    • Handle: RePEc:oup:oxecpp:v:65:y:2013:i:suppl_1:p:i115-i145
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    References listed on IDEAS

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    1. Cúrdia, Vasco & Woodford, Michael, 2016. "Credit Frictions and Optimal Monetary Policy," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 30-65.
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    7. Nobuhiro Kiyotaki, 1998. "Credit and Business Cycles," The Japanese Economic Review, Japanese Economic Association, vol. 49(1), pages 18-35, March.
    8. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
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    10. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Financial Innovation and Financial Fragility," Working Papers 2010.114, Fondazione Eni Enrico Mattei.
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    Cited by:

    1. Marcus Miller & Lei Zhang, 2015. "The Hedgehog and the Fox: From DSGE to Macro-Pru," Manchester School, University of Manchester, vol. 83, pages 31-55, September.
    2. Bastanzad , Hossein, 2014. "A New Policy Environment to Achieve Monetary Goals," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 9(4), pages 73-108, July.
    3. Engin Kara & Jasmin Sin, 2018. "The Fiscal Multiplier in a Liquidity‐Constrained New Keynesian Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(1), pages 93-123, January.
    4. John Driffill, 2016. "Unconventional Monetary Policy in the Euro Zone," Open Economies Review, Springer, vol. 27(2), pages 387-404, April.
    5. Serag Masoud & Murad A. Bein & Wagdi Khalifa, 2022. "Examining the relationship between unconventional monetary policy and exchange rate movements: Empirical evidence from United States quantitative easing," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3444-3458, July.
    6. Vivek Prasad, 2015. "Balanced Budget Tax Cuts in a Liquidity-Constrained Economy," Manchester School, University of Manchester, vol. 83, pages 87-119, September.

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