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Endogenous Liquidity and the Business Cycle

Saki Bigio

American Economic Review, 2015, vol. 105, issue 6, 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)

JEL-codes: D82 E22 E24 E32 E44 G01 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/aer.20110035
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Working Paper: Endogenous Liquidity and the Business Cycle (2014) Downloads
Working Paper: Endogenous Liquidity and the Business Cycle (2010) Downloads
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