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.
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- Pradeep Dubey & John Geanakoplos, 2006.
"Money and Production, and Liquidity Trap,"
Cowles Foundation Discussion Papers
1574, Cowles Foundation for Research in Economics, Yale University.
- Pradeep Dubey & John Geanakoplos, 2006. "Money and Production, and Liquidity Trap," Department of Economics Working Papers 06-03, Stony Brook University, Department of Economics.
- Pradeep Dubey & John Geanakoplos, 2006. "Money and Production, and Liquidity Trap," Levine's Bibliography 321307000000000261, UCLA Department of Economics.
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