Liquidity and Economic Fluctuations
No 138, Carlo Alberto Notebooks from Collegio Carlo Alberto
This paper shows that private information may be crucial in explaining the relationship between liquidity, investment and economic fluctuations. First, it defines liquidity in a way that is clearly connected to investment and output. Second, it models economies where privately informed entrepreneurs issue debt to fund their investment opportunities and identifies a theoretically based, empirically usable, and macroeconomic relevant measure of liquidity of the economy: the cross-firm dispersion in debt yields. Finally, it rationalizes one novel stylized fact regarding the US corporate bond market: the positive relationship between the proposed meaure of liquidity - the cross-firm dispersion in the "yields to maturity" on newly issued publicly traded debt - and subsequent aggregate economic activity.
Keywords: Liquidity; private information; robust pooling equilibrium; bond yield (search for similar items in EconPapers)
JEL-codes: E2 E3 G14 (search for similar items in EconPapers)
Pages: 41 pages
New Economics Papers: this item is included in nep-bec, nep-cba, nep-cta and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:138
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