Liquidity, assets and business cycles

Shouyong Shi

Journal of Monetary Economics, 2015, vol. 70, issue C, 116-132

Abstract: The objective here is to evaluate the quantitative importance of financial frictions in business cycles. The analysis shows that a negative financial shock can cause aggregate investment, employment and consumption to fall with output. Despite this realistic comovement among macro quantities, a negative financial shock generates an equity price boom as the shock tightens firms׳ financing constraint. This counterfactual response of the equity price is robust to a wide range of variations in how financial frictions are modeled and whether financial shocks affect asset liquidity or firms׳ collateral constraints. Some possible resolutions to this puzzle are discussed.

Keywords: Liquidity; Asset prices; Business cycle (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (56)

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Related works:
Working Paper: Liquidity, Assets and Business Cycles (2012)
Working Paper: Liquidity, Assets and Business Cycles (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:70:y:2015:i:c:p:116-132

DOI: 10.1016/j.jmoneco.2014.10.002

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