Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/60939 
Year of Publication: 
2011
Series/Report no.: 
Staff Report No. 520
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities, explicitly incorporating the zero bound on the short-term nominal interest rate. Within this framework, we 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 exchanges liquid government assets for illiquid private paper? We find that the effects of the liquidity shock can be large, and we show some numerical examples in which the liquidity facilities prevented a repeat of the Great Depression in 2008-09.
Subjects: 
financial crisis
liquidity shocks
financing constraints
liquidity facilities
zero lower bound
JEL: 
E44
E58
Document Type: 
Working Paper

Files in This Item:
File
Size
479.53 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.