Credit Channels in a Liquidity Trap
We study liquidity trap dynamics driven by nonfundamental shifts in expectations in a model with nominal rigidities, housing, credit frictions and a Taylor rule. Highly leveraged borrowing through nominal debt backed by real estate collateral greatly magnifies the decline in output and house prices during a liquidity trap recession. The amplification mechanism is much smaller when there is no feedback from house prices to the borrowing constraint, when debt is real rather nominal, and when leverage is small. We argue that the liquidity trap dynamics share some important features with the recent US recession and that high levels of leverage may have made the economy sensitive to expectations induced liquidity traps.
|Date of creation:||Apr 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Farmer, Roger E.A. & Waggoner, Daniel F. & Zha, Tao, 2011.
"Minimal state variable solutions to Markov-switching rational expectations models,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 35(12), pages 2150-2166.
- Roger E.A. Farmer & Daniel F. Waggoner & Tao Zha, 2008. "Minimal state variable solutions to Markov-switching rational expectations models," FRB Atlanta Working Paper No. 2008-23, Federal Reserve Bank of Atlanta.
- Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2010. "Minimal State Variable Solutions to Markov-switching Rational Expectations Models," Emory Economics 1003, Department of Economics, Emory University (Atlanta).
- Matteo Iacoviello, 2005.
"House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle,"
American Economic Review,
American Economic Association, vol. 95(3), pages 739-764, June.
- Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
- Vasco Cúrdia & Michael Woodford, 2010.
"Conventional and unconventional monetary policy,"
Federal Reserve Bank of St. Louis, issue May, pages 229-264.
- Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011.
"When Is the Government Spending Multiplier Large?,"
Journal of Political Economy,
University of Chicago Press, vol. 119(1), pages 78 - 121.
- Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
- Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2009. "When is the government spending multiplier large?," NBER Working Papers 15394, National Bureau of Economic Research, Inc.
- Mertens, Karel & Ravn, Morten O, 2010.
"Fiscal Policy in an Expectations Driven Liquidity Trap,"
CEPR Discussion Papers
7931, C.E.P.R. Discussion Papers.
- Karel R. S. M. Mertens & Morten O. Ravn, 2014. "Fiscal Policy in an Expectations-Driven Liquidity Trap," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1637-1667.
- Karel Mertens & Morten O. Ravn, 2011. "Leverage and the Financial Accelerator in a Liquidity Trap," American Economic Review, American Economic Association, vol. 101(3), pages 413-16, May.
- Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
- Hanushek, Eric A & Quigley, John M, 1980. "What Is the Price Elasticity of Housing Demand?," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 449-54, August.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:8322. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.