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Liquidity Traps and Monetary Policy: Managing a Credit Crunch

Staff Report 540 | Published February 2, 2017

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Authors

Francisco Buera Consultant
Juan Pablo Nicolini Senior Research Economist and Universidad Torcuato Di Tella
Liquidity Traps and Monetary Policy: Managing a Credit Crunch

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.




Published in _American Economic Journal: Macroeconomics_ (vol. 12, no. 3, July 2020, pp. 110-138), https://doi.org/10.1257/mac.20170040.
An earlier version of this Staff Report circulated as [Working Paper 714](https://doi.org/10.21034/wp.714).
[Online Appendix](http://researchdatabase.minneapolisfed.org/concern/publications/v692t625q)