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.
Buera, Francisco J., and Juan Pablo Nicolini.
"Liquidity Traps and Monetary Policy: Managing a Credit Crunch."
American Economic Journal: Macroeconomics,
Price Level; Inflation; Deflation
Financial Markets and the Macroeconomy
National Debt; Debt Management; Sovereign Debt