IDEAS home Printed from https://ideas.repec.org/a/bla/ecinqu/v58y2020i3p1245-1278.html
   My bibliography  Save this article

Understanding The Macroeconomic Impact Of Illiquidity Shocks In The United States

Author

Listed:
  • Chia‐Yi Yen
  • Yu‐Hsi Chou

Abstract

In this paper, we empirically investigate the role of stock market illiquidity shocks, stemming from Amihud's illiquidity measure, in explaining U.S. macroeconomic fluctuations from 1973 to 2018. We find that the impact of illiquidity shocks on economic activity is substantial, and historical decomposition analysis shows that cumulative illiquidity shocks were an essential contributor to the prolonged economic slump of the Great Recession. Moreover, our identified illiquidity shocks represent a distinct source of macroeconomic instability. This suggests that illiquidity shocks, measured by the stock price impacts, may contain more information than other types of shocks in recent studies, such as financial shocks and uncertainty shocks. (JEL C32, E32)

Suggested Citation

  • Chia‐Yi Yen & Yu‐Hsi Chou, 2020. "Understanding The Macroeconomic Impact Of Illiquidity Shocks In The United States," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1245-1278, July.
    • Handle: RePEc:bla:ecinqu:v:58:y:2020:i:3:p:1245-1278
    DOI: 10.1111/ecin.12890
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/ecin.12890
    Download Restriction: no
    File URL: https://libkey.io/10.1111/ecin.12890?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Roberto Rigobon & Brian Sack, 2003. "Measuring The Reaction of Monetary Policy to the Stock Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(2), pages 639-669.
    2. RenÈ Garcia, 2002. "Are the Effects of Monetary Policy Asymmetric?," Economic Inquiry, Western Economic Association International, vol. 40(1), pages 102-119, January.
    3. Saki Bigio, 2015. "Endogenous Liquidity and the Business Cycle," American Economic Review, American Economic Association, vol. 105(6), pages 1883-1927, June.
    4. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    5. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-430, March.
    6. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    7. Benjamin Born & Sebastian Breuer & Steffen Elstner, 2018. "Uncertainty and the Great Recession," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 80(5), pages 951-971, October.
    8. Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2011. "Investment Shocks and the Relative Price of Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 101-121, January.
    9. Munechika Katayama & Kwang Hwan Kim, 2018. "Uncertainty Shocks and the Relative Price of Investment Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 163-178, October.
    10. Andr? Kurmann & Christopher Otrok, 2013. "News Shocks and the Slope of the Term Structure of Interest Rates," American Economic Review, American Economic Association, vol. 103(6), pages 2612-2632, October.
    11. Barsky, Robert B. & Sims, Eric R., 2011. "News shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 273-289.
    12. Harald Uhlig, 2004. "Do Technology Shocks Lead to a Fall in Total Hours Worked?," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 361-371, 04/05.
    13. Ellington, Michael & Florackis, Chris & Milas, Costas, 2017. "Liquidity shocks and real GDP growth: Evidence from a Bayesian time-varying parameter VAR," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 93-117.
    14. Jing Cynthia Wu & Fan Dora Xia, 2016. "Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 253-291, March.
    15. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    16. Levine, Ross, 1991. "Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-1465, September.
    17. Florackis, Chris & Giorgioni, Gianluigi & Kostakis, Alexandros & Milas, Costas, 2014. "On stock market illiquidity and real-time GDP growth," Journal of International Money and Finance, Elsevier, vol. 44(C), pages 210-229.
    18. Nicolas Petrosky-Nadeau & Etienne Wasmer, 2013. "The Cyclical Volatility of Labor Markets under Frictional Financial Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(1), pages 193-221, January.
    19. Chen Shiu-Sheng & Chou Yu-Hsi & Yen Chia-Yi, 2016. "Predicting US recessions with stock market illiquidity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 16(1), pages 93-123, January.
    20. Nathan S. Balke, 2000. "Credit and Economic Activity: Credit Regimes and Nonlinear Propagation of Shocks," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 344-349, May.
    21. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    22. Chen, Yong & Eaton, Gregory W. & Paye, Bradley S., 2018. "Micro(structure) before macro? The predictive power of aggregate illiquidity for stock returns and economic activity," Journal of Financial Economics, Elsevier, vol. 130(1), pages 48-73.
    23. Goyenko, Ruslan Y. & Holden, Craig W. & Trzcinka, Charles A., 2009. "Do liquidity measures measure liquidity?," Journal of Financial Economics, Elsevier, vol. 92(2), pages 153-181, May.
    24. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    25. repec:hal:spmain:info:hdl:2441/5por5bt92h8l0bc7ls4elmcc0b is not listed on IDEAS
    26. Paul Beaudry & Deokwoo Nam & Jian Wang, 2011. "Do Mood Swings Drive Business Cycles and is it Rational?," NBER Working Papers 17651, National Bureau of Economic Research, Inc.
    27. Ellington, Michael, 2018. "Financial market illiquidity shocks and macroeconomic dynamics: Evidence from the UK," Journal of Banking & Finance, Elsevier, vol. 89(C), pages 225-236.
    28. DiCecio, Riccardo, 2009. "Sticky wages and sectoral labor comovement," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 538-553, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hong Shen & Qi Pan, 2022. "Risk Contagion between Commodity Markets and the Macro Economy during COVID-19: Evidence from China," Sustainability, MDPI, vol. 15(1), pages 1-20, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ellington, Michael, 2018. "Financial market illiquidity shocks and macroeconomic dynamics: Evidence from the UK," Journal of Banking & Finance, Elsevier, vol. 89(C), pages 225-236.
    2. Baruník, Jozef & Ellington, Michael, 2024. "Persistence in financial connectedness and systemic risk," European Journal of Operational Research, Elsevier, vol. 314(1), pages 393-407.
    3. Saumya Ranjan Dash & Debasish Maitra & Byomakesh Debata & Jitendra Mahakud, 2021. "Economic policy uncertainty and stock market liquidity: Evidence from G7 countries," International Review of Finance, International Review of Finance Ltd., vol. 21(2), pages 611-626, June.
    4. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    5. Ellington, Michael & Fu, Xi & Zhu, Yunyi, 2023. "Real estate illiquidity and returns: A time-varying regional perspective," International Journal of Forecasting, Elsevier, vol. 39(1), pages 58-72.
    6. Apergis, Nicholas & Artikis, Panagiotis G. & Kyriazis, Dimitrios, 2015. "Does stock market liquidity explain real economic activity? New evidence from two large European stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 38(C), pages 42-64.
    7. Inekwe, John Nkwoma, 2020. "Liquidity connectedness and output synchronisation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 66(C).
    8. Ellington, Michael & Florackis, Chris & Milas, Costas, 2017. "Liquidity shocks and real GDP growth: Evidence from a Bayesian time-varying parameter VAR," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 93-117.
    9. Munechika Katayama & Kwang Hwan Kim, 2018. "Uncertainty Shocks and the Relative Price of Investment Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 163-178, October.
    10. Nadav Ben Zeev, 2019. "Is There A Single Shock That Drives The Majority Of Business Cycle Fluctuations?," Working Papers 1906, Ben-Gurion University of the Negev, Department of Economics.
    11. Kwon, Dohyoung, 2020. "Risk Shocks and Credit Spreads," Journal of Macroeconomics, Elsevier, vol. 64(C).
    12. Netšunajev, Aleksei & Glass, Katharina, 2017. "Uncertainty and employment dynamics in the euro area and the US," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 48-62.
    13. Yadav, Jayant, 2020. "Flight to Safety in Business cycles," MPRA Paper 104093, University Library of Munich, Germany.
    14. Chen, Yong & Eaton, Gregory W. & Paye, Bradley S., 2018. "Micro(structure) before macro? The predictive power of aggregate illiquidity for stock returns and economic activity," Journal of Financial Economics, Elsevier, vol. 130(1), pages 48-73.
    15. Christoph Görtz & John D. Tsoukalas, 2013. "Sector Specific News Shocks in Aggregate and Sectoral Fluctuations," CESifo Working Paper Series 4269, CESifo.
    16. Cosmas Dery & Apostolos Serletis, 2021. "Disentangling the Effects of Uncertainty, Monetary Policy and Leverage Shocks on the Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(5), pages 1029-1065, October.
    17. Joëts, Marc & Mignon, Valérie & Razafindrabe, Tovonony, 2017. "Does the volatility of commodity prices reflect macroeconomic uncertainty?," Energy Economics, Elsevier, vol. 68(C), pages 313-326.
    18. Elstner, Steffen & Grimme, Christian & Kecht, Valentin & Lehmann, Robert, 2022. "The diffusion of technological progress in ICT," European Economic Review, Elsevier, vol. 149(C).
    19. Danilo Cascaldi‐Garcia & Ana Beatriz Galvao, 2021. "News and Uncertainty Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(4), pages 779-811, June.
    20. Chiu, Yen-Chen, 2020. "Macroeconomic uncertainty, information competition, and liquidity," Finance Research Letters, Elsevier, vol. 34(C).

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ecinqu:v:58:y:2020:i:3:p:1245-1278. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/weaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.