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http://ssrn.com/abstract=316002
 
 

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Monetary Policy in a Financial Crisis


Lawrence J. Christiano


Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Christopher J. Gust


Federal Reserve Board - Trade and Financial Studies

Jorge E. Roldos


International Monetary Fund (IMF)

June 2002

NBER Working Paper No. w9005

Abstract:     
What are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis? Under what conditions will a cut stimulate output and employment, and raise welfare? Under what conditions will a cut have the opposite e ffects? We answer these questions in a general class of open economy models, where a financial crisis is modeled as a time when collateral constraints are suddenly binding. We find that when there are frictions in adjusting the level of output in the traded good sector and in adjusting the rate at which that output can be used in other parts of the economy, then a cut in the interest rate is most likely to result in a welfare-reducing fall in output and employment. When these frictions are absent, a cut in the interest rate improves asset positions and promotes a welfare-increasing economic expansion.

Number of Pages in PDF File: 69

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Date posted: June 13, 2002  

Suggested Citation

Christiano, Lawrence J. and Gust, Christopher J. and Roldos, Jorge E., Monetary Policy in a Financial Crisis (June 2002). NBER Working Paper No. w9005. Available at SSRN: http://ssrn.com/abstract=316002

Contact Information

Lawrence J. Christiano (Contact Author)
Northwestern University ( email )
2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8231 (Phone)
847-491-7001 (Fax)
Federal Reserve Bank of Cleveland
East 6th & Superior
Cleveland, OH 44101-1387
United States
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, IL 60604
United States
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN 55480
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Christopher J. Gust
Federal Reserve Board - Trade and Financial Studies ( email )
20th St. and Constitution Ave.
Washington, DC 20551
United States
Jorge E. Roldos
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
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