Liquidity when it matters: QE and Tobin’s q

Edward Driffill () and Marcus Miller

CAGE Online Working Paper Series from Competitive Advantage in the Global Economy (CAGE)

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.

Keywords: Credit Constraints; Temporary Equilibrium; Liquidity Shocks (search for similar items in EconPapers)
Date: 2011
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Journal Article: Liquidity when it matters: QE and Tobin's q (2013)
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