On Liquidity Shocks and Asset Prices

Pablo Guerron and Ryo Jinnai (ryo.jinnai@r.hit-u.ac.jp)

No 19-E-4, Bank of Japan Working Paper Series from Bank of Japan

Abstract: In models of financial frictions, stock market booms tend to follow adverse liquidity shocks. This finding is clearly at odds with the data. We demonstrate that this counterfactual result is specific to real business cycle models with exogenous growth. Once we allow for both endogenous productivity and growth, this puzzling price dynamics easily disappear. Intuitively, the gloomy economic-growth outlook following the adverse liquidity shocks generates a predictable and negative long-run component in dividend growth, leading to the collapse of equity prices.

Date: 2019-03-13
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-fmk and nep-mac
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: On Liquidity Shocks and Asset Prices (2022)
Working Paper: Liquidity Shocks and Asset Prices (2015)
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