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Liquidity Traps and Monetary Policy: Managing a Credit Crunch

Author

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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.

Suggested Citation

  • 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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    Cited by:

    1. Vito Gala & Hongxun Ruan & Joao Gomes, 2018. "The Decline in Corporate Investment," 2018 Meeting Papers 269, Society for Economic Dynamics.
    2. Filiani, Pasquale, 2021. "Optimal monetary–fiscal policy in the euro area liquidity crisis," Journal of Macroeconomics, Elsevier, vol. 70(C).
    3. João Braz Pinto & João Sousa Andrade, 2019. "A Monetary Analysis of the Liquidity Trap with an Application to the USA," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 13(4), December.
    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. Ryoji Ohdoi & Kazuo Mino & Yunfang Hu, 2023. "Credit constraints, firm selection, and endogenous growth: The international transmission of a credit crunch via trade," Discussion Paper Series 256-2, School of Economics, Kwansei Gakuin University, revised Apr 2025.
    11. 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.
    12. Bacchetta, Philippe & Benhima, Kenza & Kalantzis, Yannick & Phillot, Maxime, 2024. "The International Transmission of Asset Market Shocks in Liquidity Traps," CEPR Discussion Papers 18904, C.E.P.R. Discussion Papers.
    13. João Braz Pinto & João Sousa Andrade, 2015. "A Monetary Analysis of the Liquidity Trap," GEMF Working Papers 2015-06, GEMF, Faculty of Economics, University of Coimbra.
    14. Athanasios Geromichalos & Lucas Herrenbrueck, 2017. "The Liquidity-Augmented Model of Macroeconomic Aggregates," Discussion Papers dp17-16, Department of Economics, Simon Fraser University.
    15. Joonkyu Choi, 2018. "Entrepreneurial Risk-Taking, Young Firm Dynamics, and Aggregate Implications," 2018 Meeting Papers 1018, Society for Economic Dynamics.
    16. 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.
    17. 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.
    18. Shaker Akhtekhane, Saeed, 2020. "Impact of entry costs on aggregate productivity: financial development matters," MPRA Paper 115221, University Library of Munich, Germany.
    19. Ohdoi, Ryoji, 2018. "International transmission of financial shocks without financial integration," Economics Letters, Elsevier, vol. 170(C), pages 46-49.
    20. Hagedorn, Marcus, 2018. "Prices and Inflation when Government Bonds are Net Wealth," CEPR Discussion Papers 12769, C.E.P.R. Discussion Papers.
    21. Montano Pierina & Quineche, Ricardo & Tipo, Royer, 2025. "Distributional Patterns in US Monetary Transmission: Quantile Cointegration Evidence," EconStor Preprints 323756, ZBW - Leibniz Information Centre for Economics.
    22. Manuel Amador & Javier Bianchi, 2023. "Helicopter Drops and Liquidity Traps," NBER Working Papers 31046, National Bureau of Economic Research, Inc.
    23. Shobande Olatunji Abdul & Shodipe Oladimeji Tomiwa, 2019. "New Keynesian Liquidity Trap and Conventional Fiscal Stance: An Estimated DSGE Model," Economics and Business, Sciendo, vol. 33(1), pages 152-169, January.

    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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