Liquidity and asset market dynamics

Guillaume Rocheteau and Randall Wright

No 1016, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: We study economies with an essential role for liquid assets in transactions. The model can generate multiple stationary equilibria, across which asset prices, market participation, capitalization, output and welfare are positively related. It can also generate a variety of nonstationary equilibria, even when fundamentals are deterministic and time invariant, including periodic, chaotic, and stochastic (sunspot) equilibria with recurrent market crashes. Some equilibria have asset price trajectories that resemble bubbles growing and bursting. We also analyze endogenous private and public liquidity provision. Sometimes it is efficient to have enough liquid assets to satiate demand; other times it is not.

Keywords: Liquidity (Economics); Asset pricing (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba and nep-dge
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Liquidity and asset-market dynamics (2013)
Working Paper: Liquidity and Asset Market Dynamics (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1016

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DOI: 10.26509/frbc-wp-201016

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