@article{48dabb667a8443a69a750aded2741653,
title = "Credit crises, precautionary savings, and the liquidity trap",
abstract = "We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers' borrowing capacity, constrained consumers are forced to repay their debt, and unconstrained consumers increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with sticky prices, if the zero lower bound prevents the interest rate from adjusting downward. Adding durable goods to the model, households take larger debt positions and the output response can be larger.",
author = "Veronica Guerrieri and Guido Lorenzoni",
note = "Funding Information: ∗For helpful comments, we are grateful to Robert Barro, Andrei Shleifer and two referees, as well as Chris Carroll, V. V. Chari, Vasco Curdia, Gauti Eggerts-son, Bob Hall, Greg Kaplan, John Leahy, Juan Pablo Nicolini, Thomas Philippon, Valerie Ramey, Rob Shimer, Nancy Stokey, Amir Sufi, Gianluca Violante, Mike Woodford, and numerous seminar participants. We thank Adrien Auclert and Iv{\'a}n Werning for generously sharing two analytical results presented in the On-line Appendix. Adrien Auclert and Amir Kermani provided outstanding research assistance. Guerrieri thanks the Sloan Foundation for financial support and the Federal Reserve Bank of Minneapolis for its hospitality. Lorenzoni thanks the NSF for financial support and Chicago Booth and the Becker Friedman Institute for their hospitality. Publisher Copyright: {\textcopyright} The Author(s) 2017. Published by Oxford University Press on behalf of the President and Fellows of Harvard College.",
year = "2017",
month = aug,
day = "1",
doi = "10.1093/qje/qjx005",
language = "English (US)",
volume = "132",
pages = "1427--1467",
journal = "Quarterly Journal of Economics",
issn = "0033-5533",
publisher = "Oxford University Press",
number = "3",
}