Endogenous Liquidity and the Business Cycle

Saki Bigio

No 24, Working Papers from Peruvian Economic Association

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.

Keywords: Liquidity; Asymmetric Information; Business Cycles (search for similar items in EconPapers)
JEL-codes: D82 E32 E44 G01 G21 (search for similar items in EconPapers)
Date: 2014-11
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Endogenous Liquidity and the Business Cycle (2015)
Working Paper: Endogenous Liquidity and the Business Cycle (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:apc:wpaper:2014-024

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