Search-Based Endogenous Illiquidity and the Macroeconomy
Sören Radde and
Wei Cui
No 546, 2015 Meeting Papers from Society for Economic Dynamics
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 funding ability 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 can positively co-move. When the capacity of the asset market to channel funds to entrepreneurs deteriorates, investment drops while the hedging value of liquid assets increases. Our model is thus able to match the liquidity hoarding observed during recessions, together with the dynamics of key macro variables.
Date: 2015
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (6)
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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 (2014) 
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:546
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