Credit Crises, Precautionary Savings, and the Liquidity Trap

48 Pages Posted: 15 Nov 2011 Last revised: 19 Jul 2023

See all articles by Veronica Guerrieri

Veronica Guerrieri

University of Chicago - Booth School of Business

Guido Lorenzoni

Northwestern University; National Bureau of Economic Research (NBER)

Date Written: November 2011

Abstract

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.

Suggested Citation

Guerrieri, Veronica and Lorenzoni, Guido, Credit Crises, Precautionary Savings, and the Liquidity Trap (November 2011). NBER Working Paper No. w17583, Available at SSRN: https://ssrn.com/abstract=1960130

Veronica Guerrieri (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Guido Lorenzoni

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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