Whither Liquidity Shocks?

Giorgio Massari and Patrizio Tirelli

No 502, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We show that popular models of (flight-to-) liquidity shocks have strongly counterfactual implications for asset returns and the composition of firms' liabilities, including the return spread between bank deposits and T-bills and the share of bank loans on corporate debt. Further, the implied estimate of the natural interest rate entails that the interest rate gap rose during recessions and fell thereafter. By including the relevant financial variables as observables in our empirical model, we can show that liquidity shocks played a negligible role and became virtually irrelevant after 2010. We also find that the slowdown in productivity growth, not liquidity shocks, caused the post-2010 fall in the natural rate.

Keywords: natural rate of interest; DSGE models; liquidity shocks; flight-to-quality; financial frictions (search for similar items in EconPapers)
JEL-codes: C11 C32 C54 E43 E44 (search for similar items in EconPapers)
Pages: 39
Date: 2022-08
New Economics Papers: this item is included in nep-dge and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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