Accounting for the Slow Recovery from the Great Recession: The Role of Credit Constraints

Francisco Buera and Juan Pablo Nicolini

No 492, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. A tightening of the collateral constraint results in a credit-crunch-generated recession that reproduces several features of the financial crisis that unraveled in 2007 in the United States. As a reaction to the crisis, the US government increased substantially the net supply of its liabilities (money and bonds, which at the zero bound are perfect substitutes). A calibrated model that incorporates both the credit crunch and the policy response of the government can account for a substantial fraction of the slow recovery in investment and output, as observed since the great recessio

Date: 2019
New Economics Papers: this item is included in nep-dge and nep-mac
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