Monetary Policy Impact: Low Inflation Amplifies Credit Crunch Effects on Economy
The article explores how different monetary policies impact the economy during a credit crunch. The researchers use a model with entrepreneurs facing financial constraints to analyze the effects. They find that maintaining a positive nominal interest rate helps stabilize output, capital, and real interest rates. Fixing the money supply leads to deflation initially, while implementing low and constant inflation can worsen the impact of a credit crunch on the economy.