IDEAS home Printed from https://ideas.repec.org/a/oup/oxecpp/v65y2013isuppl_1pi115-i145.html
   My bibliography  Save this article

Liquidity when it matters: QE and Tobin's q

Author

Listed:
  • 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.

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/oep/gps053
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Cúrdia, Vasco & Woodford, Michael, 2016. "Credit Frictions and Optimal Monetary Policy," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 30-65.
    2. Chadha,Jagjit S. & Holly,Sean (ed.), 2011. "Interest Rates, Prices and Liquidity," Cambridge Books, Cambridge University Press, number 9781107014732.
    3. Robert Shimer, 2009. "Convergence in Macroeconomics: The Labor Wedge," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 280-297, January.
    4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    6. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2007. "Business Cycle Accounting," Econometrica, Econometric Society, vol. 75(3), pages 781-836, May.
    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.
    9. Milne,Alistair, 2009. "The Fall of the House of Credit," Cambridge Books, Cambridge University Press, number 9780521762144.
    10. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Financial Innovation and Financial Fragility," Working Papers 2010.114, Fondazione Eni Enrico Mattei.
    11. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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. John Driffill, 2016. "Unconventional Monetary Policy in the Euro Zone," Open Economies Review, Springer, vol. 27(2), pages 387-404, April.
    3. 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.
    4. 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.
    5. 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.
    6. Vivek Prasad, 2015. "Balanced Budget Tax Cuts in a Liquidity-Constrained Economy," Manchester School, University of Manchester, vol. 83, pages 87-119, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Miller, Marcus & Driffill, John, 2011. "Liquidity When It Matters Most: QE and Tobin?s q," CEPR Discussion Papers 8511, C.E.P.R. Discussion Papers.
    2. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    3. Jenter, Dirk & Aldunate, Felipe & Korteweg, Arthur & Koudijs, Peter, 2021. "Shareholder Liability and Bank Failure," CEPR Discussion Papers 16309, C.E.P.R. Discussion Papers.
    4. Committee, Nobel Prize, 2022. "Financial Intermediation and the Economy," Nobel Prize in Economics documents 2022-2, Nobel Prize Committee.
    5. Georges Dionne, 2003. "The Foundationsof Banks' Risk Regulation: A Review of Literature," THEMA Working Papers 2003-46, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    6. Fratianni, Michele & Giri, Federico, 2017. "The tale of two great crises," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 5-31.
    7. Mr. Fabian Valencia, 2008. "Banks’ Precautionary Capital and Persistent Credit Crunches," IMF Working Papers 2008/248, International Monetary Fund.
    8. Ebrahimi Kahou, Mahdi & Lehar, Alfred, 2017. "Macroprudential policy: A review," Journal of Financial Stability, Elsevier, vol. 29(C), pages 92-105.
    9. Jesús Fernández-Villaverde & Lee Ohanian, 2010. "The Spanish Crisis from a Global Perspective," Working Papers 2010-03, FEDEA.
    10. Marcus Miller & Lei Zhang, 2013. "The Invisible Hand And The Banking Trade: Seigniorage, Risk-Shifting, And More," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 56(3-4), pages 365-388.
    11. Xavier Vives, 2011. "Competition and Stability in Banking," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 12, pages 455-502, Central Bank of Chile.
    12. Nicholas Crafts & Peter Fearon, 2010. "Lessons from the 1930s Great Depression," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 26(3), pages 285-317, Autumn.
    13. Anil Ari, 2015. "Sovereign Risk and Bank Risk-Taking," Working Papers 202, Oesterreichische Nationalbank (Austrian Central Bank).
    14. Jorge Ponce & Magdalena Tubio, 2010. "Estabilidad financiera: conceptos básicos," Documentos de trabajo 2010004, Banco Central del Uruguay.
    15. Nückles, Marc, 2020. "Interest rate policy and interbank market breakdown," Economic Modelling, Elsevier, vol. 91(C), pages 779-789.
    16. Albertazzi, Ugo & Barbiero, Francesca & Marqués-Ibáñez, David & Popov, Alexander & Rodriguez d’Acri, Costanza & Vlassopoulos, Thomas, 2020. "Monetary policy and bank stability: the analytical toolbox reviewed," Working Paper Series 2377, European Central Bank.
    17. Alain Kabundi & Asithandile Mbelu, 2021. "Estimating a time-varying financial conditions index for South Africa," Empirical Economics, Springer, vol. 60(4), pages 1817-1844, April.
    18. Alan Moreira & Alexi Savov, 2014. "The Macroeconomics of Shadow Banking," NBER Working Papers 20335, National Bureau of Economic Research, Inc.
    19. Lyndon Moore & Gertjan Verdickt, 2022. "Railroad Bailouts in the Great Depression," Papers 2205.13025, arXiv.org, revised May 2023.
    20. Miller, Marcus & Li, Han Hao, 2011. "When bigger isn?t better: Bail outs and bank behaviour," CEPR Discussion Papers 8602, C.E.P.R. Discussion Papers.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:oxecpp:v:65:y:2013:i:suppl_1:p:i115-i145. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://academic.oup.com/oep .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.