Liquidity When It Matters Most: QE and Tobin's Q
affiliation not provided to SSRN
Marcus H. Miller
University of Warwick - Department of Economics; Institute for International Economics; Centre for Economic Policy Research (CEPR)
CEPR Discussion Paper No. DP8511
How and why do financial conditions matter for real outcomes? The workhorse model of money and liquidity of Kiyotaki and Moore (2008) shows how - with full employment maintained by flexible prices - shifting credit constraints can affect investment and future aggregate supply. We show that, when the flex-price assumption is dropped, an adverse but temporary liquidity shock can rapidly lead to Keynesian-style demand failure. Optimistic expectations may speed recovery, but simulation results suggest that prompt liquidity infusion by the central bank - i.e. Quantitative Easing - is needed to check prolonged recession.
Number of Pages in PDF File: 40
Keywords: Credit Constraints, Liquidity Shocks, Temporary Equilibrium
JEL Classification: B22, E12, E20, E30, E44working papers series
Date posted: August 12, 2011
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