Search-Based Endogenous Illiquidity and the Macroeconomy

Wei Cui and Sören Radde

No 1367, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We endogenize asset liquidity in a dynamic general equilibrium model with search frictions on asset markets. In the model, asset liquidity is tantamount to the ease of issuance and resaleability of private financial claims, which is driven by investors' participation on the search market. Limited resaleability of private claims creates a role for liquid assets, such as government bonds or fiat money, to ease funding constraints. We show that liquidity and asset prices positively co-move. When the capacity of the asset market to channel funds to entrepreneurs deteriorates, the hedging value of liquid assets increases. Our model is thus able to match the flight to liquidity observed during recessions. Finally, we show that investors' search market participation is more intense in a constrained efficient economy.

Keywords: endogenous asset liquidity; search frictions (search for similar items in EconPapers)
JEL-codes: E22 E44 E58 (search for similar items in EconPapers)
Pages: 45 p.
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Search-based endogenous asset liquidity and the macroeconomy (2016)
Working Paper: Search-Based Endogenous Illiquidity and the Macroeconomy (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp1367

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