Working Paper: NBER ID: w22259
Authors: Marco Del Negro; Gauti Eggertsson; Andrea Ferrero; Nobuhiro Kiyotaki
Abstract: We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities and ask: Can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated with the 2008 U.S. financial crisis? Once the nominal interest rate reaches the zero bound, what are the effects of interventions in which the government provides liquidity in exchange for illiquid private paper? We find that the effects of the liquidity shock can be large, and show some numerical examples in which the liquidity facilities prevented a repeat of the Great Depression in 2008-2009.
Keywords: Liquidity Frictions; DSGE Model; Financial Crisis; Government Interventions
JEL Codes: E44; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity shock to private paper (E44) | drop in nominal interest rates (E43) |
| liquidity shock to private paper (E44) | recession (E32) |
| liquidity shock to private paper (E44) | drop in output (E23) |
| government liquidity interventions (E44) | prevent repeat of the Great Depression (E65) |
| government liquidity interventions (E44) | alleviate liquidity constraints faced by private agents (G21) |
| expected duration of liquidity shock (E44) | economic fallout (F65) |