Credit Crises and Liquidity Traps
In this paper, we argue that shocks that affect the private agents' ability to borrow are precisely the type of shocks that can push the economy in a liquidity trap. We show that, when preferences display prudence, these shocks tend to make consumers more cautious, leading both to lower levels of spending and to larger liquidity premia. Larger liquidity premia mean that the required real interest rate on highly liquid assets, like treasuries, tends to drop and can, possibly, go negative. This is what triggers a liquidity trap.
|Date of creation:||2010|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
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