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  -