The macroeconomics of financial crises : How risk premiums, liquidity traps and perfect traps affect policy options
Journal
International Advances in Economic Research
ISSN
1083-0898
ISSN-Digital
1573-966X
Type
journal article
Date Issued
2011-02
Author(s)
Abstract
The paper offers an overview of what structural models of the IS-LM and Mundell-Fleming variety can tell about the macroeconomics of economic crises. In addition to demonstrating how the emergence of risk premiums in money and capital markets can generate liquidity traps at positive interest rates and may drive economies into recessions, it shows the following: (1) Fiscal policy works even in a small, open economy under flexible exchange rates when the country is stuck in a liquidity trap; (2) Near the fringe of liquidity traps, there may be perfect traps, in which neither monetary nor fiscal policy works when used in isolation but policy coordination is called for; and (3) Massive financial crises in the domestic money market may even destabilize the economy.
Language
English
Keywords
financial crisis
credit crunch
liquidity trap
zero lower bound
risk premiums
policy options
fiscal policy
monetary policy
open economy
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Springer Verlag
Publisher place
Heidelberg
Volume
17
Number
1
Start page
12
End page
27
Pages
16
Subject(s)
Division(s)
Eprints ID
72035