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    Liquidity when it matters: QE and Tobin's q

    Driffill, John and Miller, M.H. (2013) Liquidity when it matters: QE and Tobin's q. Oxford Economic Papers 65 (S1), i115-i145. ISSN 0030-7653.

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    Abstract

    The model of credit-constrained investors developed by Kiyotaki and Moore is used to analyse ‘unconventional monetary policy’ actions taken in the US and UK. We make two contributions. The first is expositional—to show that their model of a liquidity crisis can be represented as a two-equation dynamic system in K (the aggregate capital stock) and q (Tobin’s q, the price of capital goods) with saddle-point dynamics. This allows for an intuitive, graphical exposition of the issues and results. The second is to show how a liquidity crisis leads to a deep recession when the assumption of perfect wage and price flexibility is replaced by downwardly rigid wages and prices. As in Del Negro et al., we show how central bank policies to increase liquidity can ameliorate the recession: but we use our simplified model for the purpose. Further, we analyse how fiscal intervention can help combat recession.

    Metadata

    Item Type: Article
    School: School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centres and Institutes: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: John Driffill
    Date Deposited: 21 May 2013 12:48
    Last Modified: 06 Dec 2016 14:49
    URI: https://eprints.bbk.ac.uk/id/eprint/6770

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