Abstract

http://ssrn.com/abstract=316142
 
 

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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)

May 2002

FRB of Chicago Working Paper No. 2002-05
FRB of Cleveland Working Paper No. 02-04

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 effects? 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: 75

Keywords: financial crisis, exchange rates, collateral constraints

JEL Classification: E5, F3, F4

working papers series


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Date posted: September 12, 2002 ; Last revised: November 18, 2007

Suggested Citation

Christiano, Lawrence J. and Gust, Christopher J. and Roldos, Jorge E., Monetary Policy in a Financial Crisis (May 2002). FRB of Chicago Working Paper No. 2002-05; FRB of Cleveland Working Paper No. 02-04. Available at SSRN: http://ssrn.com/abstract=316142 or http://dx.doi.org/10.2139/ssrn.316142

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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