Credit crises, precautionary savings, and the liquidity trap
By: Veronica Guerrieri, Guido Lorenzoni
Contributors: Lorenzoni, Guido; National Bureau of Economic Research
Series: NBER working paper series -- working paper 17583; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17583.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model.  After an unexpected permanent tightening in consumers' borrowing capacity, some consumers are forced to deleverage and others increase their precautionary savings.  This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices.  The output drop is larger with nominal rigidities, if the zero lower bound prevents the interest rate from adjusting downwards.  Adding durable goods to the model, households take larger debt positions and the output response may be larger"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 1/12/2012.

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