This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. May 2011
  5. Leverage and the Financial Accelerator in a Liquidity Trap

Leverage and the Financial Accelerator in a Liquidity Trap

  • Karel Mertens
  • Morten O. Ravn
American Economic Review
vol. 101, no. 3, May 2011
(pp. 413-16)
Download Full Text PDF

Abstract

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.

Citation

Mertens, Karel, and Morten O. Ravn. 2011. "Leverage and the Financial Accelerator in a Liquidity Trap." American Economic Review, 101 (3): 413-16. DOI: 10.1257/aer.101.3.413

JEL Classification

  • D84 Expectations; Speculations
  • E32 Business Fluctuations; Cycles