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Credit Crises and Liquidity Traps

Author

Listed:
  • Guido Lorenzoni

    (MIT)

  • Veronica Guerrieri

    (University of Chicago and Minneapolis Fed)

Abstract

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.

Suggested Citation

  • Guido Lorenzoni & Veronica Guerrieri, 2010. "Credit Crises and Liquidity Traps," 2010 Meeting Papers 1182, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:1182
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    File URL: https://economicdynamics.org/meetpapers/2010/paper_1182.pdf
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    Cited by:

    1. Yi Wen, 2013. "Evaluating unconventional monetary policies -why aren’t they more effective?," Working Papers 2013-028, Federal Reserve Bank of St. Louis.

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