Liquidity Flows and Fragility of Business Enterprises

Wouter J. den Haan, Garey Ramey and Joel Watson
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Wouter J. den Haan: Dept. Economics, UCLA, San Diego
Authors registered in the RePEc Author Service: Wouter Denhaan ()

No 1215, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper considers the efficiency of financial intermediation and the propagation of business cycle shocks in a model of long-term relationships between entrepreneurs and lenders, where lenders may be constrained in their short-run access to liquidity. When liquidity is low, relationships are subject to breakups that lead to loss of joint surplus. Liquidity outflows cause damage to financial structure by breaking up relationships, and damage persists due to frictions in the formation of new relationships. Feedbacks between aggregate investment and the structure of intermediation greatly magnify the effects of shocks. For large shocks, financial collapse may become inescapable in the absence of external intervention.

Pages: 50 pages
Date: 1999-04
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Citations: View citations in EconPapers (18)

Published in Journal of Monetary Economics (September 2003), 50(6): 1215-1241

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Related works:
Journal Article: Liquidity flows and fragility of business enterprises (2003)
Working Paper: Liquidity Flows and Fragility of Business Enterprises (2000)
Working Paper: Liquidity Flows and Fragility of business Enterprises (2000)
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Working Paper: Liquidity Flows and Fragility of Business Enterprises (1999)
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