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Liquidity and Economic Fluctuations

Filippo Taddei

No 138, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: 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
Date: 2010
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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