NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Credit Traps

Efraim Benmelech, Nittai K. Bergman

NBER Working Paper No. 16200
Issued in July 2010
NBER Program(s):   AP   CF   ME

This paper studies the limitations of monetary policy transmission within a credit channel frame- work. We show that, under certain circumstances, the credit channel transmission mechanism fails in that liquidity injections by the central bank into the banking sector are hoarded and 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, the model shows how small contractions in monetary policy or in loan supply can lead to collapses in lending, aggregate investment, and collateral prices.

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Document Object Identifier (DOI): 10.3386/w16200

Published: Efraim Benmelech & Nittai K. Bergman, 2012. "Credit Traps," American Economic Review, American Economic Association, vol. 102(6), pages 3004-32, October.

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