Uncovering the Effects of the Zero Lower Bound with an Endogenous Financial Wedge-Reference-Cited by-同舟云学术

Uncovering the Effects of the Zero Lower Bound with an Endogenous Financial Wedge

Published:2023-01-01 Issue:1 Volume:15 Page:135-172
ISSN:1945-7707
Container-title:American Economic Journal: Macroeconomics
language:en
Short-container-title:American Economic Journal: Macroeconomics

Author:

Cao Dan¹,Luo Wenlan²,Nie Guangyu³

Affiliation:

1. Department of Economics, Georgetown University (email: )

2. School of Economics and Management, Tsinghua University (email: )

3. College of Business, Shanghai University of Finance and Economics (email: )

Abstract

We study the effects of the zero lower bound (ZLB) on the severity of financial crises using an incomplete markets New Keynesian model with two occasionally binding constraints: a ZLB on the nominal interest rate and a borrowing constraint tied to an asset price. The model’s financial wedge corresponds to an endogenous multiplier on the borrowing constraint. Binding ZLB exacerbates financial crises through its interaction with the asset fire sale vicious cycle, driving up the financial wedge. Our results offer a novel reinterpretation of the negligible effect of the ZLB in representative agent New Keynesian models with exogenous wedges. (JEL E12, E31, E32, E43, E52, G01)

Publisher

American Economic Association

Subject

General Economics, Econometrics and Finance

Link

https://pubs.aeaweb.org/doi/pdf/10.1257/mac.20200495

Reference56 articles.

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