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Escaping from a Combination of Liquidity Trap and Credit Crunch

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  • Frank Heinemann

Abstract

This brief exposition suggests that the Federal Reserve System temporarily guarantee a lower bound on stock prices in order to escape the current combination of liquidity trap and credit crunch. It shortly discusses reasons for this measure, consequences, and some alternatives. It is meant as a policy suggestion in case the recapitalization of banks, agreed upon in mid-October 2008, turns out to be insufficient for stabilizing financial markets and the downward spiral in asset prices resumes.

Suggested Citation

  • Frank Heinemann, 2008. "Escaping from a Combination of Liquidity Trap and Credit Crunch," CESifo Working Paper Series 2450, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_2450
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp2450.pdf
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    References listed on IDEAS

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    Cited by:

    1. Naude, Wim, 2009. "The Financial Crisis of 2008 and the Developing Countries," WIDER Working Paper Series WIDER Discussion Paper 20, World Institute for Development Economic Research (UNU-WIDER).

    More about this item

    Keywords

    financial crisis; monetary policy; liquidity trap; credit crunch; asset markets;

    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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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