Liquidity Traps and Monetary Policy: Managing a Credit Crunch
Keyword(s):
We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. A tightening of the collateral constraint results in a credit-crunch-generated recession that reproduces some features of the financial crisis that unraveled in 2007 in the United States. We use the model to study the effects, following a credit crunch, of alternative monetary and fiscal policies. (JEL E31, E44, E52, E62, G01, H63)