American Economic Review Vol. 101 No. 3 2011
Leverage and the Financial Accelerator in a Liquidity Trap
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.
- DOI
- 10.1257/aer.101.3.413
- Volume
- 101
- Issue
- 3
- Pages
- 413-416
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref