Endogenous Liquidity and the Business Cycle
American Economic Review
vol. 105,
no. 6, June 2015
(pp. 1883-1927)
Abstract
I study an economy where asymmetric information about the quality of capital endogenously determines liquidity. Liquid funds are key to relaxing financial constraints on investment and employment. These funds are obtained by selling capital or using it as collateral. Liquidity is determined by balancing the costs of obtaining liquidity under asymmetric information against the benefits of relaxing financial constraints. Aggregate fluctuations follow increases in the dispersion of capital quality, which raise the cost of obtaining liquidity. An estimated version of the model can generate patterns for quantities and credit conditions similar to the Great Recession. (JEL D82, E22, E24, E32, E44, G01)Citation
Bigio, Saki. 2015. "Endogenous Liquidity and the Business Cycle." American Economic Review, 105 (6): 1883-1927. DOI: 10.1257/aer.20110035Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- E22 Investment; Capital; Intangible Capital; Capacity
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises