TY - JOUR AU - Guerrieri,Veronica AU - Lorenzoni,Guido TI - Credit Crises, Precautionary Savings, and the Liquidity Trap JF - National Bureau of Economic Research Working Paper Series VL - No. 17583 PY - 2011 Y2 - November 2011 DO - 10.3386/w17583 UR - http://www.nber.org/papers/w17583 L1 - http://www.nber.org/papers/w17583.pdf N1 - Author contact info: Veronica Guerrieri University of Chicago Booth School of Business 5807 South Woodlawn Avenue Chicago, IL 60637 Tel: 773/834-7834 Fax: 773/702-0458 E-Mail: vguerrie@chicagobooth.edu Guido Lorenzoni Department of Economics Northwestern University 2211 Campus Dr Evanston, IL 60208 Tel: 847/491-8243 E-Mail: guido.lorenzoni@northwestern.edu AB - We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers' borrowing capacity, some consumers are forced to deleverage and others increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with nominal rigidities, if the zero lower bound prevents the interest rate from adjusting downwards. Adding durable goods to the model, households take larger debt positions and the output response may be larger. ER -