Credit Traps

40 Pages Posted: 14 Mar 2010  

Efraim Benmelech

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Nittai Bergman

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 13, 2009

Abstract

This paper studies the limitations of the ‘credit channel’ in transmitting monetary policy into real economic outcomes. We focus on one particular failure of the credit channel in which although the central bank is infusing money into the banking system, liquidity remains stuck in banks and is not lent out. We use the term ‘credit traps’ to describe such situations and show how they can arise due to the interplay between financing frictions, liquidity, and collateral values. Our analysis offers a characterization of the problems created by credit traps as well as potential solutions and policy implications. Among these, the analysis shows how quantitative easing and fiscal policy acting in conjunction with monetary policy may be useful in increasing bank lending. Further, small shifts in monetary or fiscal policy can lead to collapses in lending, aggregate investment, and collateral prices.

Keywords: Liquidity, Credit Channel of Monetary Policy, Collateral, Banking

JEL Classification: G21, G33, E51, E63

Suggested Citation

Benmelech, Efraim and Bergman, Nittai, Credit Traps (November 13, 2009). AFA 2011 Denver Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1570328 or http://dx.doi.org/10.2139/ssrn.1570328

Efraim Benmelech

Northwestern University - Kellogg School of Management ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nittai Bergman (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

50 Memorial Drive
Cambridge, MA 02142
United States
617-253-2933 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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