Occasionally binding liquidity constraints and macroeconomic dynamics

Maximilian Werner

Journal of Economic Dynamics and Control, 2023, vol. 150, issue C

Abstract: What drives nonlinearities in modern macroeconomic models? Building on global methods, the present paper isolates the effects associated with an occasionally binding constraint in a widely discussed macro-finance framework. Only the proper computational treatment provides a holistic understanding of the (hidden) economics in tail events, and the full reflection of large and consecutive shocks in economic forecasts. An improper treatment provides an overestimation of asset pricing dynamics and a misleading association between high levels of capital and liquidity and high levels of investment.

Keywords: Occasionally binding constraints; Global nonlinearities; Financial frictions; Liquidity; Business cycles (search for similar items in EconPapers)
JEL-codes: C60 E30 E44 E50 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:150:y:2023:i:c:s0165188923000155

DOI: 10.1016/j.jedc.2023.104609

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