TY  - JOUR
AU  - Christiano,Lawrence J.
AU  - Gust,Christopher
AU  - Roldos,Jorge
TI  - Monetary Policy in a Financial Crisis
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9005
PY  - 2002
Y2  - June 2002
UR  - http://www.nber.org/papers/w9005
L1  - http://www.nber.org/papers/w9005.pdf
N1  - Author contact info:
Lawrence Christiano
Department of Economics
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-8231
Fax: 847/491-7001
E-Mail: l-christiano@northwestern.edu

Christopher Gust
Federal Reserve Board
Mail Stop 42B
20th and C Street, N.W.
Washington, D.C. 20551
E-Mail: christopher.j.gust@frb.gov

Jorge Roldos
International Monetary Fund
700 19th Street, N.W.
Washington, D.C. 20431
E-Mail: jroldos@imf.org
AB  - What are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis? Under what conditions will a cut stimulate output and employment, and raise welfare? Under what conditions will a cut have the opposite e ffects? We answer these questions in a general class of open economy models, where a financial crisis is modeled as a time when collateral constraints are suddenly binding. We find that when there are frictions in adjusting the level of output in the traded good sector and in adjusting the rate at which that output can be used in other parts of the economy, then a cut in the interest rate is most likely to result in a welfare-reducing fall in output and employment. When these frictions are absent, a cut in the interest rate improves asset positions and promotes a welfare-increasing economic expansion.
ER  -