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Leverage and the Financial Accelerator in a Liquidity Trap

The American economic review, 2011-05, Vol.101 (3), p.413-416 [Peer Reviewed Journal]

Copyright© 2011 The American Economic Association ;Copyright American Economic Association May 2011 ;ISSN: 0002-8282 ;EISSN: 1944-7981 ;DOI: 10.1257/aer.101.3.413 ;CODEN: AENRAA

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Title:
Leverage and the Financial Accelerator in a Liquidity Trap
Author: Mertens, Karel ; Ravn, Morten O.
Subjects: Analysis ; Collateral ; Consumption ; Credit ; Debt management ; Debt restructuring ; Economic conditions ; Economic deflation ; Economic depression ; Economic models ; Economic recessions ; Entrepreneurs ; Equilibrium ; Financial leverage ; Households ; Housing ; Interest rates ; Liquidity ; Liquidity trap ; Monetary economics ; Monetary models ; Monetary policy ; NEW APPROACHES FOR MODELING RISK IN MACROECONOMICS ; Pessimism ; Price elasticity ; Prices ; Real estate economics ; Recessions ; Retail stores ; Steady states ; Sticky prices ; Studies
Is Part Of: The American economic review, 2011-05, Vol.101 (3), p.413-416
Description: We show that the financial accelerator may be very large in a liquidity trap. We study a sticky price model with real estate and a financial friction specified as a collateral constraint. Expectations can lead the economy to a self-fulfilling liquidity trap equilibrium where the lower bound on the nominal interest rate binds. We model these equilibria as stochastic sunspots. As in the Great Depression, a liquidity trap entails house price depreciation and potentially large output losses. Higher leverage implies much larger output losses but at the same time rules out the existence of short-lived liquidity traps. [PUBLICATION ABSTRACT]
Publisher: Nashville: American Economic Association
Language: English
Identifier: ISSN: 0002-8282
EISSN: 1944-7981
DOI: 10.1257/aer.101.3.413
CODEN: AENRAA
Source: ProQuest Central

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Leverage and the Financial Accelerator in a Liquidity Trap

Copyright© 2011 The American Economic Association ;Copyright American Economic Association May 2011 ;ISSN: 0002-8282 ;EISSN: 1944-7981 ;DOI: 10.1257/aer.101.3.413 ;CODEN: AENRAA

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