Endogenous Cycles and Liquidity Risk

Jos van Bommel ()

No 149, Money Macro and Finance (MMF) Research Group Conference 2006 from Money Macro and Finance Research Group

Abstract: Using an overlapping generations model with liquidity risk, we show that equilibrium aggregate investment and asset prices are cyclical. In an economy with neither a beginning nor an ending date, a stationary equilibrium can be obtained. In a startable equilibrium however, economic activity is highly cyclical. The first generations and consecutive odd ones invest most of their wealth in new long lived technologies, while even generations flock to seasoned claims that are sold by liquidity challenged older cohorts. We find that this liquidity driven cyclicality is driven by the optimal length of the investment horizon, not by agent live span

Keywords: Business Cycles; Overlapping Generations; Liquidity (search for similar items in EconPapers)
JEL-codes: D91 E32 E43 (search for similar items in EconPapers)
Date: 2007-02-02
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:mmf:mmfc06:149

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