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Liquidity when it matters : QE and Tobin’s q

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Driffill, John and Miller, Marcus (2011) Liquidity when it matters : QE and Tobin’s q. Working Paper. Coventry, UK: Department of Economics, University of Warwick. CAGE Online Working Paper Series, Volume 2011 (Number 68).

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Abstract

When financial markets freeze in fear, borrowing costs for solvent governments may fall towards zero in a flight to quality – but credit-worthy private borrowers can be
starved of external funding. In Kiyotaki and Moore (2008), where liquidity crisis is captured by the effective rationing of private credit, tightening credit constraints have
direct effects on investment. If prices are sticky, the effects on aggregate demand can be pronounced – as reported by FRBNY for the US economy using a calibrated
DSGE-style framework modified to include such frictions.
In such an environment, two factors stand out. First the recycling of credit flows by central banks can dramatically ease credit-rationing faced by private investors: this is
the rationale for Quantitative Easing. Second, revenue-neutral fiscal transfers aimed at would-be investors can have similar effects. We show these features in a stripped- down macro model of inter-temporal optimisation subject to credit constraints.

Item Type: Working or Discussion Paper (Working Paper)
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Economics -- Mathematical models , Liquidity (Economics) , Investments, Quantitative easing (Monetary policy), Stock exchanges
Series Name: CAGE Online Working Paper Series
Publisher: Department of Economics, University of Warwick
Place of Publication: Coventry, UK
Official Date: December 2011
Dates:
DateEvent
December 2011Published
Volume: Volume 2011
Number: Number 68
Number of Pages: 46
Institution: University of Warwick
Status: Not Peer Reviewed
Publication Status: Published
Access rights to Published version: Open Access
Funder: Economic and Social Research Council (Great Britain) (ESRC)
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